20 Things You'll Want to Know – Motley's Fool

After years of promises by Prime Minister Justin Trudeau and months of debate in the Canadian Parliament, our northern neighbor is officially legalizing adult leisure marijuana starting today, October 17th. 2018. The adoption of the Cannabis Act of June 19, 2018 and the proverbial green flag waved today put an end to about nine decades of prohibition of adult use.

What exactly does this mean on a larger scale, as well as for marijuana investors? Let 's take a closer look at the 20 things you will want to know about today' s historic event.

1. Legalization varies by province

For starters, although the cannabis law (Bill C-45) legalizes cannabis consumed by adults in Canada, the provinces of the country are free to change the rules and regulations as they see fit. This could mean raising the legal age of purchase to 19 or keeping it at 18, as in Alberta and Quebec. Provinces also have the final say on where consumers can buy marijuana (ie, private or government-run clinics and online), and on the possibility of growing them at home. them.

2. Foreign markets should generate the majority of long-term revenues

Certainly, the legalization of marijuana in Canada is historic because it represents the first time that an industrialized country gives the green light to weeds for recreational purposes. But do not expect the internal market to be the long-term breadwinner of the industry. According to Health Canada, domestic demand is expected to reach only about 1 million kilograms per year. By way of comparison, foreign markets where the medical legend is legal could consume more than twice that amount each year, making them much more important in the vast pattern of Canadian pot stocks.

3. All types of consumption are not legalized

Do not forget that, even though marijuana is legalized, this does not mean that all forms of consumption will be on clinic shelves. The cannabis law specified that only dried marijuana blossom and cannabis oils were legal for sale today, with alternative products such as edible products, vapes, concentrates and beverages made from cannabis. cannabis not allowed for sale.

4. It is not known when many alternative products will get the go-ahead

The industry experts and the marijuana growers themselves expect that these alternative pot products will be marketed by Health Canada in 2019. However, there is no evidence Precise timing to determine when Parliament will discuss expanding consumer options, which means more than conjectures at this point.

5. Alternative cannabis products are what will allow differentiation

Why so much attention for alternative cannabis products? Simple: they tend to be a product with a margin that is considerably higher than that of dried flowers, and they experience much less pressure on prices in the long run. These alternatives, including oils, vapes and infused beverages, will also be essential to helping marijuana stocks stand out from their competitors. A perfect example is Aphriaof (NASDAQOTH: APHQF) construction of a cannabis extraction facility capable of producing 25,000 kg / year of equivalent concentrate per year.

6. Excise taxes on jars are exceptionally low compared to alcohol

Canada is working to combat illegal marijuana sales by introducing an exceptionally low excise tax on legal weed sales. This excise tax is about 10%, which is considerably less than the excise tax on beer, wine and spirits between 50% and 80% in Canada.

7. The black market will not disappear

However, even a relatively small excise tax will not be enough to completely drive Canada's black market out – at least in the beginning. Illegal cannabis players do not have to pay excise tax, federal income, or culture and sales license fees. It is also assumed that the overhead costs of illegal gamblers are lower. This allows the black market to easily undermine legal pricing, which could become a bigger problem than investors and pot companies realize.

8. Marijuana sales are poised to skyrocket

Despite continuing threats from the black market, weed sales are poised to skyrocket, and marijuana equity investors are well aware of this. Giants of the industry as Canopy Growth Corp. (NYSE: CGC) and Aurora Cannabis (NASDAQOTH: ACBFF) sales are expected to grow by 355% and 639% respectively this year, and by 157% and 119% next year.

9. However, production is nowhere close to capacity

Once again, for revenues to increase over the next few quarters, investors also need to understand that production capacity will not peak at its peak. For example, Aurora Cannabis is targeting an annual processing capacity of 100,000 kilograms by the end of 2018, but ultimately plans to produce more than 570,000 kilograms at full speed. Aurora, like Canopy Growth, Aphria and all other marijuana stocks, still have years to go before production becomes almost optimal.

10. Over-supply remains a long-term concern

However, when the production capacity of the majority of marijuana stocks reaches its peak, the sector may be seriously concerned about oversupply. According to current forecasts, the annual output of Canadian companies is expected to easily exceed 3 million kilograms by 2020 or 2021, which means that foreign markets will have to buy a lot of pot. If marijuana stocks are struggling to displace this excess capacity, the price of dried flowers per gram could be significantly lower.

11. A handful of marijuana stocks could control more than half of the market

It is interesting to note that when cannabis producers run out of steam, only a handful of producers can control more than half of the market. According to my own approximate calculations, Aurora Cannabis (once its ICC Laboratories (bought deal) exceeds 600,000 kilograms, while Canopy Growth and Aphria record about 500,000 kilograms and 255,000 kilograms. Add to Tilray and The Dutchman Bio Vert, and these five marijuana stocks could generate up to 1.8 million kilograms of combined production by 2020 or 2021.

12. All profits from the Canadian pot should be accompanied by an asterisk at this point

Have marijuana stocks seen green in the profit column? Well, take off your blinkers. Despite the fact that few pot stocks have generated encouraging profits to date, almost all of these revenues are the result of (legal) accounting under International Financial Reporting Standards (IFRS) in Canada. In simple terms, reporting producers of bribes in Canada are able to adjust the value of their cannabis plants whenever they want, which leads many of them to declare a profit. with an asterisk large enough.

13. Most pot stocks are well capitalized

Although their profits may be nothing more than accounting and mirrors, marijuana companies do not lie when they tout their cash-rich balance sheets. Conscious of the need to rapidly increase their production capacity, develop their international infrastructure and develop their brands, the pot stock has not hesitated to increase its own funds. When Corona and Modelo brewers Constellation Brands (NYSE: STZ) closes its $ 3.8 billion investment in Canopy Growth, which will have more than $ 4 billion in cash.

14. Non-dilutive financing options are now available for pot companies

Until the adoption of the Cannabis Act on June 19, Canadian stocks of publicly traded marijuana had only one way to raise capital: bids for purchase . These offers involve the sale of common shares, convertible debentures, stock options and / or warrants to an investor or group of investors in order to raise capital. Of course, since marijuana is now legal, non-dilutive options, such as bank loans and lines of credit, are now available to cannabis companies.

15. Share-based dilution is a multi-year problem

Although buying offers are essential to the expansion of the marijuana sector, they will also have a negative impact on pot stocks (and investors) in the long run. By selling shares, debt that can be converted into shares and options or warrants that can be exercised in shares, the pot companies have inflated the number of their shares outstanding. Aurora Cannabis, for example, could soon exceed one billion shares outstanding after only 16.2 million shares outstanding just over four years ago. These additional shares not only dilute existing investors, but they make it even harder for a cannabis stock to generate significant earnings per share.

16. Expect negotiations to continue

The growth of the cannabis industry is undeniable, which means that companies outside the pot industry are taking notice. As previously mentioned, Constellation Brands is taking a massive stake in Canopy Growth, giving it a 38% stake in the company. Constellation and Canopy will collaborate in the search for cannabis-based products, as well as Constellation's excellent distribution and marketing prowess, to increase Canopy's reach (where grass is legal, of course). Expect agreements like this – though perhaps not of this magnitude – to continue.

17. Do not forget auxiliary companies

Investors are so focused on companies that come into direct contact with the cannabis plant that they have almost forgotten ancillary businesses working in the background to support this industry. Think of companies like KushCo Holdings (NASDAQOTH: KSHB), which provide packaging, branding and marketing solutions to pot manufacturing companies around the world to keep them in compliance with local laws. KushCo also supplies hydrocarbon gases and solvents used in the production of cannabis oils and concentrates. These auxiliary stocks have the potential to produce even larger gains than producers.

18. There is life beyond Canada

It's probably worth noting that while all investors are focused on Canada, the world of cannabis is beyond the Canadian border. In the United States, 30 US states have legalized cannabis legally since 1996. In fact, California's recreational marijuana sector can generate more annual sales all of Canada. In other words, even if Canada is a marijuana maverick, there are many other opportunities.

19. Volatility is a way of life

If you plan to invest in marijuana stocks, you must expect a bumpy ride. Clearly, there will be winners. But that also means that there could be completely flat marijuana stocks. Given the legitimacy of leisure, few investors know how to approach these actions, resulting in a lot of volatility. Take Tilray, who fired $ 25 a share at $ 300 in four weeks, and quickly returned two-thirds of his value over the next three days.

20. The story says that marijuana stocks are in a bubble

Last but not least, no investor wants to hear: Marijuana stock is almost certainly in a bubble and it may not end properly. Over the last quarter century, no investments have been made in the last 25 years, just like marijuana stocks, which have maintained their long-term gains. Internet, business-to-business, genomics, 3D printing and blockchain have all seen their bubbles burst. Chances are that marijuana stocks will face a similar fate.