Disclaimer: This is not investment advice of any sort and not the views of myself or anyone at HighClub. We are sharing insights and opinions of people within the industry.
The year 2018 is very interesting for the investors of marijuana stocks in Canada.
Many licensed producers of cannabis believe that the expectations of investors are too high with marijuana legalization in Canada scheduled to take place this year on July 1st.
Recreational marijuana is a rapidly growing market in Canada, and several investors have huge investments in weed stocks in Canada.
Reality vs. speculation
Some of the executives of the Canadian marijuana industry are saying that they’ve realized that it can be hard to justify the valuations of the marijuana stocks in Canada.
It’s important that investors have an idea about the coming times because expecting too much can often lead to disappointment.
Neil Closner is the Chief Executive Officer of the well-known company, MedReleaf Corp. Recently, he gave an interview to The Globe and Mail where he explained the current situation, and he predicted the coming days of weed stocks in Canada.
According to Closner, right now people are valuing companies on the basis of the total production announced by each company.
However, that does not mean those companies will be able to produce that amount because there are risks involved during the phase of execution.
Investors have huge expectations from marijuana stocks in Canada for different reasons.
However, the reality of the situation may not be the same.
|Company||Gains (2017)||Market Cap||Revenue (12-month)|
|Canopy Growth Corp. (TSX:WEED)||225%||$6.27 Bn||$58 million|
|Aurora Cannabis Inc. (TSX:ACB)||317%||$6.11 Bn||$23 million|
|Aphria Inc. (TSXV:APH)||271%||$2.99 Bn||$22 million|
|MedReleaf Corp. (TSX:LEAF)||124%||$2.62 Bn||$41 million|
The chart shows four marijuana companies in Canada, which includes MedReleaf Corp., Aphria Inc., Aurora Cannabis Inc., and Canopy Growth Corp.
The gains of MedReleaf Corp. were 124% with a market capitalization of $2.62B. The total revenue of the company in the last twelve months was $41M.
Aphria Inc. had 271% gains in 2017 with market capitalization of almost $3B. However, its revenue was $22M.
The other two companies in the chart are Aurora Cannabis Inc. and Canopy Growth Corp.
Aurora Cannabis Inc. had 317% gains and more than $6B in market capitalization; its revenue for the last twelve months was $23M.
Canopy Growth Corp. tops the chart with gains of 225% and $6.27B of market capitalization. It enjoyed the highest revenue in Canada at $58M.
This information can help one to understand the reality of the current situation for marijuana companies in Canada.
There is a gap between expectations and current performance. It explains why weed stocks in Canada are extremely susceptible to negative development.
Currently, the largest producer of pot in Canada is Canopy Growth, and it’s currently trading at a price-to-sales multiple of over 60 times, which is obviously an alarming situation.
How the shift in US policy towards marijuana could affect Canadian companies
In the first week of January 2018, we saw a huge drop in marijuana stocks when an indication from the United States Attorney General Jeff Sessions was announced that they would change their pledge for the prosecution of crimes related to marijuana.
This is happening at a time when many states are working to legalize marijuana.
The experts in the US say that the move of the United States Attorney General can help boost the cannabis industry of Canada.
Many states in the US were planning to legalize the drug for both recreational and medical purposes. In some states, the cannabis is already legal for recreational use, and residents of other states were demanding similar legislation from their respective governments.
The federal law of the US prohibits the use of marijuana, and the new memo from the US Attorney General says federal prosecutors will be allowed to aggressively enforce the law wherever the drug is legal.
The news has affected the marijuana stocks in Canada, and different companies experienced visible ups and downs in the market.
Russel Stanley is the analyst of Echelon Wealth Partners. He said that the federal law of the US is surely going to benefit the investors of weed stocks in Canada.
The law will not allow the US-based cannabis companies to rise and challenge their Canadian competitors who are expanding internationally. If outlawed, there would not be much competition for Canadian producers because the US companies will be out of the game.
The United States’ federal law makes it illegal to possess, distribute or cultivate marijuana. During the Obama era, more than twenty states legalized the medical use of marijuana.
On January 1st, 2018, California legalized the recreational use of cannabis.
Several executives of US-based marijuana producers have criticized the current US Attorney General. However, the current situation could be very beneficial for the Canadian marijuana producers.
Marijuana Stocks: What should be investors’ approach?
The question that arises is what should be the approach of investors towards marijuana stocks in Canada.
The Government of Canada is very serious about meeting the July 1st deadline for marijuana legalization in Canada.
Different measures taken by the government show it will be happening for sure. It will open the doors to many opportunities; however, there are different risks that should not be ignored.
At this moment, it is difficult to say how big the size of this opportunity is or the reaction of consumers.
The previous analysis of different experts show that this may be the time for risk-adverse investors to take their profits and watch from the sideline.
The focus in the Canadian marijuana industry will shift to execution, where a bumpy ride at first can be expected and a potentially risky ride for investors in the cannabis industry could occur.