Canada is undoubtedly one of the greatest countries on earth. They’ve got universal healthcare, beautiful scenery, a whole region that speaks French and an awesome prime-minister. Now, Canada is about to reach a new milestone that would make it even better, the legalization of cannabis. Earlier this year, a bill was introduced to Canadian Parliament that would legalize cannabis by July 1, 2018. While the bill is definitely an exciting development for the Canadian society, it also opens a lot of new opportunities for investors, who will be more willing to invest in new cannabis stocks.
However, for Canadian investors investing in marijuana stocks is not going to be a new thing, since medical use has been legal in the country since 2001. In 2016, the sales of medical marijuana amounted to 31,790 pounds, while this year the sales are estimated at 72,400 pounds. It is projected that sales will reach 275,000 pounds by 2020.
Marijuana stocks have been a profitable investment opportunity. If we look at the largest Canadian marijuana companies like Canopy Growth Corp (TSX:WEED), Aphria Inc (OTC:APHQF), and Aurora Cannabis Inc (TSX:ACB), all of which went public in the last year or so, all their stocks have gained substantial value since the IPO. That’s probably because there aren’t pure play marijuana stocks based in the US. Stocks like GW Pharmaceuticals (NASDAQ: GWPH), Insys Therapeutics (NASDAQ:INSY) and AbbVie Inc. (NYSE:ABBV) have been pitched as “marijuana stocks”. GW Pharmaceuticals (GWPH) is a biopharmaceutical company known for its cannabis based multiple sclerosis treatment medicine Sativex. Insys Therapeutics (INSY) is also a specialty pharmaceutical company that focuses on cannabinoids based treatments. AbbVie Inc (NYSE:ABBV) also has an FDA approved cannabis based drug on the market but AbbVie Inc is a $150+ billion company that has a very small exposure to the medical marijuana market. Moreover, none of GW Pharmaceuticals, Insys Therapeutics, and AbbVie Inc will benefit directly from the legalization of the recreational marijuana.
The legalization of recreational pot should provide another boost to marijuana companies in Canada, as they will be able to tap into a new market. According to a Forum poll in 2016, around five million adult Canadians consume cannabis at least once a month and once it becomes legal, this number is expected to increase by 19%. In April, Quinnipiac University also conducted a survey, which found that 94% of Canadians support legalizing medical marijuana. Canaccord Genuity projects that the number of frequent recreational cannabis users will amount to 3.8 million by 2021. Last month, Canaccord said that sales of recreational marijuana in the coutry could reach CAD $6 billion ($4.5 billion) by 2021. Earlier this year, Canadian stock market also got its first marijuana ETF, Horizons Marijuana Life Sciences ETF (TSX:HMMJ), whose value has gained 44% since it started trading in April.
Some companies are already readying themselves for assaulting the new growth opportunities and to capture market share. Canopy Growth Corp (TSX:WEED), which is already the largest marijuana producer in Canada, with a license to produce 68,343 pounds of cannabis and related products, has recently announced plans to invest at least CAD $25 million to upgrade its production facility in order to triple the capacity by July 2018. Also earlier this year, Aurora Cannabis Inc (TSX:ACB) has made an unsolicited bid to buy CanniMed Therapeutics Inc (TSX:CMED) for a maximum of $18.75 per share. If the merger goes through, it will be the largest in the industry history and it’s most likely that it won’t be the last one.
Copyright: atomazul / 123RF Stock Photo
However, there is a problem surrounding the hype around legalization of recreational weed. As investors in Canada got excited about the new prospects they bid marijuana stocks to sky-high levels and made them highly overvalued. For example, none of the three aforementioned stocks, Canopy Growth Corp (TSX:WEED), Aphria Inc (OTC:APHQF), and Aurora Cannabis Inc (TSX:ACB) have reported any profits yet. Aurora Cannabis Inc (TSX:ACB), one of the best-performing marijuana stocks, which surged by over 147% since the IPO, is trading at 116.1 times sales, while Canopy Growth Corp (TSX:WEED)’s and Aphria Inc (OTC:APHQF)’s stocks sport price-to-sales ratios of 48.4 and 69.2, respectively. By comparison, the mean price-to-sales ratio for the S&P 500 companies is 1.47.
Now, in this environment, investing in most Canadian marijuana stocks is risky as they are newly-established enterprises and their businesses have yet to prove themselves. One workaround strategy to invest in the new industry is to invest in the marijuana ETF as it offers exposure to a variety of stocks, which reduces the risk.
Another approach could be to wait for a while until the industry settles and the leaders are established. However, this strategy eliminates the high returns that come with taking advantage of a new potentially booming market. There is a third option though, investing in small and overlooked cannabis stocks. One of these stocks is True Leaf Medicine (CNSX:MJ). The company, founded in 2013, is currently conducting an equity crowdfunding campaign in the US, planning to raise up to CAD $10 million ($7.75 million) by selling around 14.29 million shares at CAD $0.70 apiece. The offering comes under the Regulation A+ final rules, which allows small, early-stage companies to access capital by going to both the institutional and retail investment community (see the details here).
True Leaf Medicine (CNSX:MJ) is in the final stage to become a licensed producer of medical marijuana, and has received the approval to build a production facility in Lumby, British Columbia. The company expects that the facility will have a capacity of 2,500 dried cannabis per year. Even though True Leaf’s medical cannabis subsidiary, True Leaf Med, was established in 2013, the company doesn’t have a license to produce cannabis from Health Canada and plans to obtain it once the facility is completed and the security inspection goes through.
