One reader wrote to suggest the legalization of marijuana represents “the
chance of a lifetime” for investors. Just as alcohol companies prospered
after the end of prohibition, he sees cannabis producers as sitting on a
potential gold mine.
To bolster his argument, he cites the pent-up demand for recreational
marijuana and quotes Health Canada as saying there won’t be enough supply
to meet the demand. “While company valuations are high, they are still a
fraction of those of the tobacco industry,” he added.
It’s true that the industry has tremendous growth potential. But there are
also some unresolved issues that investors must consider before committing
their hard-earned cash.
One is the fragmented state of the industry. At this stage, it’s somewhat
like the dotcom start-ups of the 1990s. Many companies want a piece of the
action, but no one can predict with certainty which ones will survive and
prosper and which will go belly-up.
We also need to consider the regulatory environment. The provinces are
racing against the clock to formulate the rules, establish pricing, and set
up the distribution systems for pot sales within their jurisdiction. Except
for some broad outlines, we don’t know what form these will take or what
impact they will have on the marijuana producers.
Then there is the U.S. to consider. Recreational cannabis is not legal in
most U.S. states, and the federal government has served notice it will
start cracking down on illegal sales. The point man is Attorney-General
Jeff Sessions, who according to The Washington Post is almost
obsessed with eradicating weed. (He once said that he changed his views on
the Ku Klux Klan when he found they smoked pot. Supposedly he was joking.)
Sessions announced last month that he has rescinded an Obama-era directive
not to prioritize the prosecution of dispensaries in states that have
legalized the drug.
No one is sure how that directive will translate into action, and the
challenge to states’ rights it implies may mean it all ends up before the
U.S. Supreme Court. But it creates a lot of uncertainty for Canadian
producers who sell their product into the U.S. in violation of federal
laws. There have even been warnings that those companies might be delisted
from the Toronto Stock Exchange and some firms are in the process of
divesting their U.S. ties.
Other producers have issued statements designed to reassure investors that
they will fully comply with U.S. law.
Canopy Growth (TSX: WEED), the largest marijuana producer in Canada, said in a Jan. 5 press release
that it will only do business in jurisdictions where cannabis is legal
federally and will comply with all laws.
Given all these question marks, I have been reluctant to recommend any
marijuana stocks. But here is a rundown on three of the leading Canadian
companies in this industry. Keep in mind that the financials are based only
on medical products, which have been legal in Canada for years.
Canopy is based in the small Ontario town of Smith’s Falls. It has a market
cap of about $4.8 billion. The stock took off like a rocket in the second
half of last year, going from a 52-week low of $6.58 in June to a high of
$44 in early January. But then reality set in, and the shares have dropped
about $12 from the high.
Canopy may have its roots in rural Ontario, but it operates in seven
countries and has 665,000 square feet of production capacity. It offers a
wide variety of products under various brand names in dried, oil, and
capsule form. Its latest quarterly report showed a year-over-year revenue
increase of over 100% but a bottom line loss of $1.6 million ($0.01 per
share). The loss over the first six months of the 2018 fiscal year was
$10.8 million ($0.07 per share).
Aphria Inc. (TSX: APH).
This company, based in Leamington, Ontario, has a market cap of $2.4
billion. It grows its marijuana in greenhouses in Southwestern Ontario,
using the slogan “powered by sunlight” to distinguish itself from
The company is positioning itself to be a leader in both the medical and
recreational side of the business. It recently signed a deal with Shopper’s
Drug Mart to supply medical cannabis products, which will be sold on-line
for now as regulations restrict pharmacies from in-store sales. On the
recreational side, it has committed $10 million to a company that will
combine the products of TS BrandCo. Holdings Inc. (operating as "Tokyo
Smoke") and DOJA Cannabis Company Limited.
“The combination of Tokyo Smoke and British Columbia based DOJA would bring
together two premium lifestyle brands to serve the anticipated recreational
cannabis market,” the company said in a press release. “Aphria's investment
represents an advancement of the company's strategy to be a leader in the
recreational market, once legalized in Canada.”
The company posted a 40% year-over-year revenue gain in the first quarter
of fiscal 2018. Net income was $15 million ($0.11 per share), the best
among the major Canadian producers. That was up from $0.9 million ($0.01
per share) in the same quarter the year before.
Again, we have seen a similar pattern in the share price performance. The
stock went from a low of $4.55 in early June to $24.75 on Jan. 9. But it
has since retreated significantly, closing recently at about $16.
Aurora Cannibis (TSX: ACB). This company is based in Vancouver and has a market cap of $1.5 billion.
The company currently operates a 55,200 square foot production facility in
Mountain View County, Alberta and a 40,000 square foot facility in
Pointe-Claire, Quebec. It is currently constructing an 800,000 square foot
production facility at the Edmonton International Airport, as well as
completing a fourth facility in Lachute, Quebec through its wholly owned
subsidiary Aurora Larssen Projects Ltd. It also holds interests in related
companies in Australia and Germany.
On Nov. 9 the company announced results for the first quarter of fiscal
2018 (to Sept. 30). Revenues rose 169% over last year. Net income was $3.6
million ($0.01 per share).
As with Canopy and Aphria, the stock took off in the second half of last
year, rising from $1.90 per share in June to a high of $14.88 at the start
of this month. It too has pulled back recently, closing recently at $11.33.
So, what are we to make of all this? Clearly, this is a business with great
but unknown potential. But it’s in its infancy, and the recent stock price
performance is a good indication that investors are unsure how to properly
value these companies at this point.
If you want to invest in this sector, I suggest your best option is an
exchange-traded fund that gives you exposure to a range of companies. A
logical candidate is the new
Horizons Marijuana Life Sciences Index ETF (TSX: HMMJ), which was launched last April and has already attracted more than $700
million in assets.
It tracks the North American Marijuana Index, which includes publicly
traded companies from across the continent with an emphasis on Canada. In
fact, Canopy, Aurora, and Aphria together comprise just over 40% of the
As a result, it should not be surprising that the fund’s performance
reflects the same pattern we have seen in the individual stocks. It was
issued at $10 per unit, dropped to a low of $8.21 last June, and then took
off to reach a high of $25.56 on Jan. 9. But it went downhill after that,
closing recently at $19.10. Perhaps that’s a bargain, or it could be a
falling knife, as investors wake up to the many unresolved issues in the
If you have the willpower to cope with this volatility and want exposure to
the marijuana sector, this ETF should be your choice. But note that it is
not suited to conservative investors, and the management fee is on the high
side at 0.75%. Talk it over with your financial advisor before making a
Gordon Pape is one of Canada’s best-known personal finance commentators and
investment experts. He is the publisher of
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© 2018 by The Fund Library. All rights reserved.
The foregoing is for general information purposes only and is the opinion
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