The marijuana industry is a very difficult sector for investors to assess. With a number of large American firms having produced and sold marijuana for years, investing domestically has remained difficult to do for the average retail investor, given the fact U.S. cannabis companies are barred from public listing due to Federal laws which deemed illegal the green commodity.
Canada’s cannabis industry, on the other hand, offers investors seeking an interest in the global cannabis industry with a means of doing so, something which has intrigued many in the lower 48 for some time now.
As the vast majority of publicly traded marijuana companies are in their infancy, with relatively short performance histories, much of the recent stock price appreciation that companies such as Canopy Growth Corp (TSX:WEED) have seen of late can be linked to positive investor sentiment surrounding the ability of such producers to consistently turn large profits. With increasing consolidation within the publicly traded cannabis sector, and buzz related to the Federal legalization in Canada which is set to roll out officially in 2018, investors getting in today may be able to ride the wave ever higher, banking on continued high double-digit growth in a sector which has massive potential upside.
Here are some of the pros and cons investors should consider before buying into Canadian cannabis firms.
Positive Sentiment=Massive Price Appreciation
Canopy Growth, Canada’s largest publicly traded cannabis producer, has seen its share price appreciate by nearly 50% over the past month alone, a fact which has driven concerns valuation multiples have begun to get ahead of themselves as investor demand has significantly outpaced the supply of publicly traded marijuana companies for some time. That said, the company’s $3.8 billion valuation remains small potatoes when compared to estimates as to the size of recreational marijuana markets worldwide.
Canopy’s ability to continue to build its global network via acquisitions and partnerships in other key global markets which have legalized caanabis (recreational or medicinal) is another reason Canopy is often looked to as a benchmark for publicly traded cannabis producers and the primary option for investors in a sector chock full of options for investors.
Huge American Investment
In a bid to diversify portfolio exposure, a number of U.S. firms have begun looking north to take advantage of the global legalization trend in the marijuana sector, a trend which many expect to continue for some time.
Canopy has seen plenty of short-term momentum following a deal with Constellation Brands, Inc. (NYSE:STZ) in which the liquor producer has agreed to purchase a 10% stake in the Canadian cannabis producer for $245 million, valuing the largest publicly traded cannabis company in the world by market capitalization at $2.5 billion at the time. As part of the deal, Constellation Brands received warrants to make another equity investment equal to 10% of the float at below $13 per share — a screaming deal, given Canopy’s current share price hovering around $20.
Since the announcement of the investment, shares of Canopy have soared to record highs. Currently, Canopy is valued at more than $3.8 billion, a valuation which has largely priced in growth related to the Canadian recreational market but which leaves room for international growth should Canopy begin to invest with conviction in the U.S. market, a scenario which currently is uncertain.
Taxation Remains a Question
Much of the forward momentum producers such as Canopy have seen of late is related to the legalization of marijuana in Canada, a roll-out which has not yet been fully flushed out by the Canadian government. With Canada now announcing its tax plan related to the green commodity (including a significant excise tax on marijuana sales), another potential factor for cannabis investors has emerged: to what extent taxation at the retail level will impact prices and margins as marijuana producers re-evaluate pricing amid production growth which remains strong globally.
Chris MacDonald has no position in any aforementioned mentioned in this article.