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Is all the buzz around marijuana investing deserved? How did the value of marijuana stocks get so high in the first place? Why are they currently on a bit of a low? And with valuations at a discount, is now a good time to get in on the action?
Clearly, there are big risks. But there are also big rewards for investors in this fast-growing new industry. After all, marijuana legalization is scheduled to take place very soon.
Anyway, it seems inevitable at this point. How can you add marijuana to your investment mix? With Canadian investors in mind, we took an in-depth look at these questions.
Legalization isn’t as simple as when the House of Commons votes to create a new marketplace. Many politicians are enthusiastic. However, they know that there are many other considerations and costs involved. For those interested in marijuana investing, it’s top of mind.
The marijuana marketplace has grown up fast, even before legalization
When is the absolute best time to invest in the fast-growing marijuana industry? Actually, that was probably more than a year ago. Canada’s Prime Minister campaigned on legalizing marijuana in the last election. The thinking was to disrupt the black market. At the same time, while they could create a windfall of tax revenue and they’d get a substantial cash infusion from a legalized marijuana industry.
In response to the enthusiasm, investors poured money into cannabis companies. Some of these quickly went from penny stocks to high-flying billion-dollar firms.
For instance, the market cap of the top five cannabis stocks alone grew by 400%. Canopy Growth Corp., the leader in Canada, has a market cap of over $5 billion. If you got in early enough, you saw a 261% return on your investment. Aurora Cannabis had a slightly smaller market cap. However, it posted a 1-year return of 353%. PharmaCan Capital’s stock was up 385%.
The whole reason we saw such startling triple-digit returns for marijuana stocks year? Deregulation. Sooner or later, it’s coming.
A bigger market than just Canada
Marijuana legalization creates a global opportunity. It is not confined to the Canadian marketplace. However, it is a also a unique situation. The usual big gorilla on the block, corporate America, is a no-show. Consider legalization in individual American states like Colorado and California. There, federal law still cuts American companies out of the competition.
That means, for once, Canadians can step over their southern cousins and become global leaders in a brand-new industry. This is green pasture territory. It is a dreamy prospect for investors looking for profit.
The marijuana industry includes over 85 companies with a combined market value of $30 billion. Some believe the global medicinal marijuana marketplace alone could be worth US$31.4 billion by 2021. According to Eight Capital, it could be worth $180 billion by 2025. Some think Canadians might be coming late to this market. Medical cannabis programs started here as early as 2001. If anything, we set the trends.
However, the big growth we have seen so far isn’t likely to continue forever. Investors looking into this industry need to manage their expectations.
Today, marijuana investing is about diversification. After all, there’s volatility. You’re betting on companies that must prove their worth by generating sales. What kind of sales? That’s the billion-dollar question.
Not every marijuana start-up has all the answers. So, what are paying customers really looking for? That is still up for debate.
Overview: Where the marijuana industry is today
There are different kinds of potential customers for marijuana. The first, smaller group is the smokers. But the second group includes people who consume cannabis in other ways. After all, customers can do it through food, beverages, supplements or other means. Also, medical marijuana is a big potential area of growth. Additionally, there are specialty products that cross over into the bigger food and beverage territory.
According to Evolve ETFs’ research, in 2015, there were just five countries where medical marijuana was legalized (or in the process of being legalized). By 2017, that shot up to 25 countries.
Canada is a leader in this sector. It legalized medical marijuana in 1999. The big breakthrough though came in 2015. There were new rules to allow value-added products. The Supreme Court said restricting legal access to only dried products was unconstitutional. This opened up the market with new product lines. That in turn transformed the medical marijuana landscape.
The number of adult Canadians who use recreational marijuana could be about 20 per cent of the population. How do we know this? The government is trying to get a better handle on the actual number. It’s tracking the THC-laced product that winds up in our sewers. Canadians spent $5.7 billion on marijuana for medical and non-medical purposes in 2017. Market studies estimate the value of the Canadian recreational marijuana market in 2018 to be about $7.9 billion.
Beverages will likely be big business for the marijuana industry. Energy drinks and health supplements of every variety will separate themselves from the pack by infusing them with marijuana extracts. Some companies are planning cannabinoid-infused beverages for launch in 2018. These products have huge potential for sales.
It could be an easy way for companies outside the marijuana industry to get a foot in the door in this growing industry. Alcohol giant, Constellations Brands, owner of Corona, purchased a 9.9% stake in Canopy Growth Corp (WEED.TSX).
Risks in marijuana investing
There are still many questions around the legalization process. Uncertainty is sure to prompt additional volatility. Continue Reading…