Marijuana Stocks: The Next Big Thing Or The Next Big Short?

Value Digger

Let's start by saying that the use, possession, sale, cultivation and transportation of cannabis is illegal under federal law in the U.S. The Obama administration followed a hands-off approach while the federal government has articulated that if a state passes a law to decriminalize cannabis for recreational or medical use, it can do so, under the condition that a regulation system for cannabis is in place. Therefore, some U.S. states (Alaska, Colorado, Nevada, Washington, Washington D.C., Oregon, Maine) have already legalized cannabis, while Massachusetts and California will join the club in 2018.

Meanwhile, Canada has legalized the medical use of marijuana since 2001. As a result, the Canadian producers have been growing their crops in warehouses and directly sending their products to patients by mail or courier service.

Additionally, the Canadian government has introduced legislation that will legalize the recreational use of marijuana throughout the country by July 2018, fulfilling an election promise by Trudeau. As such, Canada will become the global leader in cannabis and the first developed country permitting recreational as well as medical use of marijuana. At present, only Uruguay has a national legal regime permitting widespread use of cannabis. These are some of the key points of the proposed legislation in Canada:

1) Canadians will be allowed to possess up to 30 gr of dried or fresh cannabis for personal use and can grow up to four plants at home, provided they are not more than one meter high.

2) The minimum age for recreational use of marijuana will be 18 y.o. However, provinces will have the right to change the minimum age of 18 y.o. and set a higher minimum age given that they will most likely control cannabis distribution (as they do it already with the liquor stores).

3) The federal government will impose penalties of up to 14 years in prison for selling or giving away marijuana to minors.

4) Driving will be illegal within two hours if an illegal level of drugs is found in the blood. Police will be given authority to administer a saliva test for cannabis if a driver shows signs of use, including the smell of cannabis or reddened eyes.

In other words, it seems that the horse has left the barn. And we believe that Amsterdam style "coffeeshops" will eventually become more and more popular in the Canadian towns over the next years.

Currently, the economic impacts from the opening of the recreational market in North America can't be accurately estimated although some project that the marijuana market in the U.S. will $50 billion a year by 2026. On that front, it's noteworthy that the Reno Gazette Journal reported that according to Marijuana Business Daily estimates, Nevada's recreational market alone could generate $75 million or more in sales this year and $450 million to $550 million annually down the road. Also, California's economy generated $2.8 billion in 2015 with $6.5 billion annually by 2020, the marijuana investment firm Arcview Group projects that cannabis will bring $1 billion annually to Massachusetts by 2020, while some of the largest legal marijuana retailers in the world are located in Colorado.

Although nobody can't currently make reliable forecasts regarding the financial implications of "going weed" over the next years, we do believe that the growth of the legal cannabis market will materially affect the pharmaceutical market given that a significant number of patients could turn to medical cannabis as a substitute or complement to pharmaceuticals.

Nevertheless, investors must exercise extreme caution when it comes to the marijuana sector which is in its infancy stages. Complacency is a killer no matter what the marijuana bulls want to make you believe through their speculative articles that quite often lack serious fundamental analysis.

The valuable lessons learned thanks to the previous bubbles in the stock markets can help you through the bad times and can be applied to your portfolio when you stumble upon the emerging marijuana industry. As a friendly reminder, some of the recent bubbles in the stock markets include the dot-com bubble in 1999, the rare earth bubble in 2010 and the Chinese reverse merger boom and bust in 2011.

At the end of the day, this is what's going to happen with the marijuana stocks:

1) The big players: Some firms will separate themselves from the pack and will grow both organically and via mergers or acquisitions, so they will eventually become large cultivation, production and distribution companies. Industry Goliaths with pockets as deep as those of Canopy Growth (WEED.T), Aurora Cannabis (ACB.T) and Aphria (APH.T) will swallow the small players and ultimately will dominate the sector. As such, it's fair to assume that there's going to be a fair amount of consolidation along the way. For instance, Canopy Growth Corp. has acquired Mettrum Health while Aurora Cannabis has acquired Peloton Pharmaceuticals Inc., Pedanios GmbH and recently made an unsolicited bid to acquire CanniMed Therapeutics (CMED.T).

2) Small and medium firms: Industry consolidation will also create a large pool of small and medium players. On that front, Friday Night (TGIFF) recently announced an all-stock acquisition of Body & Mind (BMMJ) while other potential takeover targets are Delta 9 Cannabis (NINE.V), ABCANN Global (ABCN.V), MYM Nutraceuticals Inc. (MYMMF), My Marijuana Canada (MYM.C), Global Cannabis Applications (FUAPF), Maricann Group (MRRCF) and Cannabis Sativa (CBDS) to name a few.

3) Bubbles and scams: Other firms will join the marijuana party for a quick buck, but they disappear from the marijuana map becoming part of the boom and bust list, which is a typical buyer beware situation.

4) New niche markets: Aside from the aforementioned producers and distributors, there will be companies that will carve a permanent niche in the marijuana market opening up new markets such as Constellation Brands (STZ) that bought a stake Canopy Growth in an effort to identify early-stage consumer trends (i.e. beer with marijuana), Cannabix Technologies (BLOZF) that focuses on the marijuana breathalyzer development for law enforcement and the workplace, Canabo Medical (CMM.V) that owns and operates Canada's largest physician led referral-only clinics for medical cannabis, BLVD Centers (CXV.V) that focuses on detoxification and outpatient rehabilitation market and operates treatment centers in California and Oregon, Cannabis Wheaton Income (CBW.V) that provides funding for facility expansions, operations and initial construction in exchange for minority equity interests and a portion of the cultivation production, Organigram Holdings (OGI.V) which focuses on extracts and cannabis oils, The Scotts Miracle-Gro Company (SMG) that is developing a line of pesticides for marijuana plants, GW Pharmaceuticals (GWPH), AbbVie (ABBV), Insys Therapeutics (INSY) and Pivot Pharmaceuticals (PVOTF), four pharmaceutical companies that have gained attention for their marijuana-based drugs.

Most of the marijuana stocks have doubled or tripled over the last months on the hope of continued legalization efforts and superb growth, so the line separating investment, speculation and bubble has already become blurred and the marijuana stocks are not for the faint of heart. Based on our database, these are today's (01/03/2018) cannabis industry averages for the Canadian and US-based firms:

Price/projected Earnings: Above 600 times

Price/projected Sales: Above 200 times

Price/Book: Above 15 times

Price/projected adjusted EBITDA: Above 300 times

Me and my team of industry experts keep a close eye on this industry and plan to reveal in the Premium section of The Alpha Discoverer our best marijuana ideas of 2018 in the coming weeks. As is often the case with our picks for our subscribers, we look for overlooked and promising stocks from the marijuana industry with catalysts and strong fundamentals. Stay tuned!

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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Disclaimer: The opinions expressed here are solely my opinion and should not be construed in any way, shape, or form as a formal investment recommendation. Value Digger does not accept any liability for any loss or damage whatsoever caused in reliance upon such information. Investors are advised that the material contained herein should be used solely for informational purposes. Investors are reminded that before making any securities and/or derivatives transaction, you should perform your own due diligence. Investors should also consider consulting with their broker and/or a financial adviser before making any investment decisions.

Comments (5)
No. 1-5

My criterion is that although it is a new and emerging way of investing?


Aurora seems to be performing well...


Great summary, Thank you for another insightful analysis, VD


Excellent analysis. I own both BLOZF and CBW, fingers crossed.