When will marijuana stocks be profitable? – The fool

Ready or not, the legalization of leisure is on our doorstep for our northern neighbor. Within 40 days, licensed clinics will be able to sell adult cannabis to people aged 18 or over, depending on the province.

In addition to making Canada 's history by becoming the first industrialized country to give the go – ahead to weeds for recreational purposes, legalization also means a lot of money for Canadian marijuana stocks. While estimates vary widely – as an industry is expected to be unprecedented – legal cannabis in Canada is expected to generate annual sales of approximately $ 5 billion. Remember that before the adoption of the Cannabis Act, Canadian marijuana companies produced hundreds of millions of dollars a year selling marijuana for medical purposes in Canada.

Source of the image: Getty Images.

When can we expect profits from pot stocks?

The key question is: When will marijuana stocks start generating profits on a recurring basis?

Unfortunately, there is no single answer.

The two generic characters that will more or less determine when a marijuana stock has the potential to become profitable are (1) capacity expansion and (2) corporate reinvestment.

Continued capacity expansion will limit profitability

Although the cannabis law was adopted by Parliament on June 19, it did not seem like a sure thing until the end of last year. Although marijuana is clearly a very lucrative business, producers would not spend hundreds of millions of dollars to increase their capacity until they knew for sure that the move was likely. This is why Wall Street and investors have been facing a frantic race to develop their capabilities, forge partnerships and make acquisitions in the first half of this year.

However, the speed at which growers increase their capacity varies from one pot stock to the other. For example, Aurora Cannabis (NASDAQOTH: ACBFF) plans to become the largest producer of weeds in Canada, with 570,000 kilograms of annual yield at full capacity. But Aurora has recently announced plans to build the 1.2 million square foot Aurora Sun plant in Medicine Hat, Alberta, including the strategic partnership with Alfred Petersen a & Son in Denmark. In short, Aurora Cannabis still has a lot of initial costs to face in the meantime, which will probably prevent it from generating profits.

Source of the image: Getty Images.

Reinvestment of companies could absorb some or all of the benefits

The other factor at play here is reinvesting businesses. The next logical step in the evolution of the marijuana industry, beyond expanding capacity, is that sales, marketing infrastructure and branding are designed from scratch. For example, a number of leading producers have chosen to partner with a software giant as a service. Shopify (NYSE: SHOP). Shopify's e-commerce platform is expected to play the role of intermediary for cannabis orders. He will be responsible for order fulfillment as well as anticipating customer needs. Shopify has already partnered with the Liquor Control Board of Ontario and Aurora Cannabis, among other producers.

Back to current producers, the largest stock of pot by market capitalization, Canopy Growth Corp. (NYSE: CGC)will probably not be profitable in the near future, as it will reinvest most of its operating cash flow into the construction of its sales channels and product development abroad. Following the announcement of the production of beer Modelo and Corona Constellation Brands will make a $ 3.8 billion investment in Canopy Growth, pending regulatory approval, with Canopy having over $ 4 billion to deploy as part of its global infrastructure and brand development strategy.

Source of the image: Getty Images.

Auxiliary pot stocks are the best bet for anticipated profits

Although it is very difficult to say when most marijuana stocks will be profitable on a recurring basis, stocks of ancillary products, that is, companies that do not directly touch cannabis, nevertheless play a crucial role industry – having the best shot of "delivering the green".

A real estate investment trust (REIT) is an already profitable auxiliary weed stock that could see earnings per share increase even more in the coming year. Innovative properties (NYSE: IIPR).

The idea behind an REIT is that it buys real estate or real estate that is concentrated in a specific area and then leases it for an extended period. A lot years later, he may choose to sell the property for a profit. Innovative Industrial Properties acquires medical cannabis farms in the United States and leases them between the ages of 15 and 20, with annual rent increases and management fees to ensure it stays ahead of the inflation curve. The company has been profitable for many quarters now, and given its fixed-cost structure and predictable cash flows from its long-term leases, innovative industrial properties are expected to remain highly profitable in the coming years. .

In my opinion, it is possible that we would start seeing recurring profitability as of the end of 2019 for producers, but the supply and demand prospects being totally unknown, the marijuana auxiliary titles seem to be your best. bet.