3 Digits That Marijuana Stock Investors Had Better Know – The Fool Motley

According to the beer, wine and spirits giant, the legal marijuana market could reach $ 200 billion in 15 years Constellation Brands (NYSE: STZ). If their forecasts are almost accurate, marijuana stocks could then offer investors the opportunity to invest in an emerging market that could compete with tobacco or alcohol one day.

The potential for profit on the pot is enormous, but that does not mean that all cannabis producing companies will win. Many will be losers and more than a few could end up bankrupt. To increase the chances of choosing the right cannabis stock to buy, you need to make sure you know:

• Whether on a solid financial basis.
• If marijuana production is up.
• If the product mix of the company is about.

No. 1: Financial firepower

The Canadian marijuana market is an important market for cannabis companies, but it is not as big as that of the United States or major European markets.

According to Statistics Canada, marijuana spending in Canada is about C $ 6 billion a year. However, the US market is valued at $ 50 billion and global spending at about $ 150 billion a year, according to the United Nations. Clearly, capturing a significant portion of the Canadian market as its new leisure market evolves will be a boon, but capturing a significant share in America and elsewhere is more important.

The companies likely to benefit the most from legalization worldwide are probably those with the deepest pockets. It is therefore essential to constantly monitor the changes in the balance sheet of these companies. As a reminder, a balance sheet is a financial statement that highlights the assets, liabilities and equity of a company. Evaluating the evolution of cash and debt can be particularly useful for investing in high quality companies able to profit from the growing market of legal cannabis.

For example, the deepest pockets of the industry belong to Cover growth (NYSE: CGC). Last year, Constellation Brands acquired an approximate $ 38 billion stake in Canopy Growth, for an amount of about $ 4 billion, allowing it to invest in new greenhouses. , automation of greenhouses, facilities and equipment for cannabis extraction, product development, clinical research trials and, most importantly, new technologies. markets. Canopy Growth has begun to flex this financial muscle, but it still has most of the money at its disposal. In December, it acquired the Colorado hemp company ebbu for 425 million Canadian dollars, but only 25 million US dollars of this transaction were paid in cash. The rest of the transaction was in stock. In addition, Canopy Growth announced in January its intention to invest in a hemp industrial park under construction, but this project is expected to cost only $ 100-150 million. As of December 31, Canopy Growth had $ 4.1 billion in cash, plus $ 799 million in marketable securities, which it is possible to sell on its balance sheet, so these investments barely reduce its stock.

Here are some selected balance sheet items in Canopy Growth.

Data source: quarterly business filings. Numbers in thousands of Canadian dollars.

N ° 2: production in pot

It is tempting to spend a lot of time looking at the maximum pot production figures that cannabis companies talk about, but investors should keep in mind that these predictions are not engraved in stone. The plans may change, so there is no guarantee for a company that expects a production to go from 10,000 pounds to 100,000 pounds or more in the future, which will actually deliver on its promises.

Quarterly production is a better measure to follow. In particular, it is essential to change the kilos sold and the pounds harvested, as this tells investors if a company is already implementing its growth strategy in order to make the most of the mature Canadian market and the new opportunities that come with it. are available elsewhere, as in Germany or elsewhere. United States.

For example, Aurora Cannabis (NYSE: ACB) took a two-pronged approach to increasing marijuana capacity. This is probably the most greedy buying company, but it is also reinvesting in its largest greenhouses, including Aurora Sky. This approach allowed him to sell nearly 7,000 kilograms of marijuana and marijuana equivalent products in the fourth quarter of 2018, up 502% from one year to the next. It also produced 7,822 kilos in the last quarter, up 550%, allowing it to grow its business this quarter.

Here is an overview of Aurora's production and sales of cannabis.

Data source: quarterly business filings.

In fact, Aurora Cannabis claims that its marijuana production capacity was 120,000 kilograms per year starting in February and that 25,000 kilograms of marijuana would be available for sale at the end of the quarter ended in June 2019. C & # 39; This is potentially good news for investors because many of the new production comes from Aurora Sky, where automation is expected to significantly reduce production costs and improve gross margin.

N ° 3: product range

The Canadian marijuana market is unlikely to be worried about marijuana overproduction for a few years, but large investments in the entire industry could eventually lead to exceptional harvests that cap price of dried flowers. We have already seen this momentum in Colorado, America's oldest recreational marijuana market. Last fall in Colorado, the average price of a pound of marijuana was less than $ 800, compared with more than $ 2,000 a pound in 2015.

To avoid the risk of a decline in marijuana prices, it will be necessary to focus on finished products containing marijuana as an ingredient, such as edible products, beverages and oils. Extract-based products traditionally offer better pricing power than dried flowers. It is therefore essential to know to what extent the stock of flower pots comes from finished consumer products.

For example, product extracts, including oils and capsules, accounted for 33% of Canopy Growth's sales revenue but only 22% of Aurora Cannabis's net sales last year. quarter. This difference helps explain why the average price per gram of Canopy Growth has decreased by less than the average price of Aurora Cannabis in the past year.

Data source: quarterly business filings. Figures in Canadian dollars.

Eyes on the future

The potential for significant sales growth and a potential profit one day makes pot stocks incredibly interesting, but the industry is not without risks. The trend towards widespread legalization in key markets, including the United States, has developed; however, there is no guarantee that marijuana will become legal at the federal level in America in the near future.

Nevertheless, billions of dollars are already moving into legal and regulated markets in Canada. Given that 80% of Canadian spending still occurs on the black market, revenues are expected to continue to grow for cannabis companies, including Canopy Growth and Aurora Cannabis. It is too early to say for sure which companies will be the most successful in this market. So be sure to follow closely the evolution of their balance sheets, their production and their product mix to find clues to determine which company will be the best. investment.