6 Things You Need to Know – The Motley Fool

The countdown is nearly over. Following on from the Senate and the passage of the Cannabis Act on June 19, Canada is set to become the first industrialized country in the world to legalize recreational marijuana, and only the second overall behind Uruguay, exactly one week from today, one Oct. 17

When legal, marijuana will be a big business. If you have a lot of money, you can expect a lot of money in the world, Wall Street is looking for somewhere in the neighborhood of $ 5 billion in new annual sales. The "added" part comes from the fact that the legal profession in Canada is already selling medical cannabis domestically, as well as shipping it abroad.

With investors now able to count on two hands how close to legalization is here, here are the six things to know we approach Oct. 17.

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1. Emotions and volatility will remain high

The first thing you should be aware of is that volatility in marijuana is expected to remain in place. Because it's a huge amount of money, it's going to be a lot of money.

Of course, they are dangerous marijuana stocks that investors will want to avoid at all costs. As an example, New Age Beverages Corp. (NASDAQ: NBEV) recently announced its entry into the cannabidiol-based beverage market with a new line of drinks. Alternative cannabis products like infused beverages are a hot commodity at present. Yet, the field is growing more crowded by the day, and New Age Beverages are not profitable. In fact, New Age Beverages should be used in the current quarter, which is a notable red flag.

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2. Every province has different rules and regulations

Second, it's important to understand that Canada's legalization, much like the state-level legalizations in the United States, are not one size fits all. Instead, provinces are free to set up their own rules and regulations, which may include the provision of 18 Page 18

Although not all provinces will allow private retailers, one of the intriguing beneficiaries of the Canadian legalization is software-as-a-service platform Shopify (NYSE: SHOP). Already growing like a weed, Shopify is partnering with the Ontario Liquor Control Board in February to manage its mortar, online, and mobile sales within the province. Shopify has also partnered with all of the most important growers to assist you with online shopping.

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3. Exports will be more than half of all sales

Next, do not overlook the expectation that a majority of Canadian pot sales will come from overseas markets. Even though recreational marijuana is likely to bring in plenty of sales in Canada, it is more likely that it will be more effective.

Again, while estimates vary, Health Canada believes that domestic demand will total around 1 million kilograms a year. However, by the time 2020 rolls around, Canadian growers could be working on a run of 3 million (or more) kilograms a year. Where does this excess supply go? The hope is that foreign countries that've legalized medical pot will gobble it up. Since most of these overseas markets have been developed, they are expected to be active buyers of Canadian cannabis.

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4. High-margin products are still on the back burner

Another thing you can not realize is that it's not going to be cheap. According to the Cannabis Act, cannabis and cannabis can be purchased on Oct. 17, but other alternatives, such as vapes, cannabis-infused beverages, concentrates, and edibles, will not be legal.

The expectation among the industry is that sometime in 2019. There is, however, no timetable on which can be reached. This makes the partnership between HEXO Corp. (NASDAQOTH: HYYDF) and Molson Coors Brewing Co. (NYSE: TAP) particularly interesting.

HEXO and Molson Coors formed a joint venture at the beginning of August with the intention of producing cannabis-infused beverages. There are no guarantees, however, that these alternatives will be approved anytime soon. Molson Coors, but would be a substantial negative for HEXO, which would have a substantial negative impact on the quality of the Molson Coors joint venture.

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5. Initial shortages appear likely, but should give way to oversupply

Despite what the Canadian federal govern- ment has suggested, the chance of an initial supply of electricity is very high (again, pun fully intended). Many of the biggest growers are still in the process of ramping up their production, which could make a huge difference.

If there is a positive to be had here, it's that many of the biggest growers have been actively building their inventories prior to the Oct. 17 launch date. Growers also have a relatively good job of sticking to their budgets and timelines with regard to capacity expansion.

The downside is that when there is a reality, it is a real chance that it could be far above and beyond. If Canadian marijuana producers could not find an effective way to move their excess production, which, as noted, could top 3 million kilograms annually by 2020, it would be adversely weighing on the per-gram price of weed, hurting margins.

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6. Profits could be elusive in the early going

Sixth and finally, investors should really understand that marijuana stocks are not expected to be substantially profitable right out of the gate. There is still a lot of room for expansion, marketing, product innovation, and developing their international infrastructure. Looking at this purely from an operating basis, and not including fair value crop adjustments, most pot stocks are probably going to lose money.

One of the best examples is Canopy Growth Corp. (NYSE: CGC), which could arguably be the most well-rounded of all marijuana stocks. Despite a peak (author-estimated) projection of around 500,000 kilograms for Canopy Growth, a well-recognized brand name in Tweed, and a massive partner in Constellation BrandsThe company is not expected to be profitable in its current fiscal year. Canopy Growth will probably be spending too much money on its international strategy and via acquisitions to turn a profit.

In other words, the start of the green rush does not mean a "green rush" of money for investors.