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Stocks of marijuana companies went wild, anticipating multi-billion dollar sales and other opportunities, with Canada becoming the first G-7 country to legalize cannabis on Wednesday.
Like any growing and relatively new sector, the cannabis industry can be confusing, with a high potential for scams, as the Securities and Exchange Commission warned, so investors need to know the basics. For starters, there are a handful of large companies that actually affect the marijuana plant – an important distinction – and there are industry-specific metrics that can help investors understand the underlying business.
There are six major public cannabis companies that require attention: Aphria Inc.
APHQF, + 4.78%
APH + 4.13%
, Aurora Cannabis Inc.
ACBFF, + 11.03%
CBA + 9.92%
, Cronos Group Inc.
CRON, + 19.07%
CRON, + 18.46%
, Canopy Growth Corp.
GSC + 14.24%
CANNABIS, + 13.64%
, GW Pharmaceuticals PLC
GWPH, -0.06%
and Tilray Inc.
TLRY, + 11.69%
TLRY, + 11.69%
. Five of them are Canadian and listed on the Toronto Stock Exchange and in the United States or in the over-the-counter market, while the other is based in the United Kingdom.
All produce quarterly thousands of kilograms of weeds, which is essential because dozens of small businesses, both public and private, still have to market their products. We expect that some of them will die and others will prosper.
Read now: All potential red flags for investors in IGC, the pot stock that jumped 1,000% in three months
With the approach of Canadian legalization, MarketWatch describes each of these six companies, addressing the parameters described below, to give investors a clearer picture of their activities:
Profile of Aphria: Coming later this week.
Aurora Profile: Coming later this week.
Cronos Profile: Coming later this week.
Profile of the canopy: Canopy Growth is the $ 4 billion gorilla of the cannabis industry.
GW Profile: Coming later this week.
Tilray Profile: Tilray, a Vancouver Island, has global ambitions
We've also brought in more that may be a challenge for these companies, and some that will offer marijuana-related products or services that do not involve selling weed products.
As with any business, profits and results are critical to the success of cannabis companies. Of the five largest producers in Canada in terms of market capitalization (GW Pharmaceuticals is based in the UK), all have sales of drugs, but some are not yet profitable. With the recreational pot fishing on the horizon, Canadian companies are making big bets to take over the estimated sales of one billion Canadian dollars – or $ 771 million – that will come from Here the end of the year. But they can not remain unprofitable forever.
In addition to profits and sales, investors must closely monitor five other criteria when assessing companies in the sector.
In what business are they?
In the long run, some cannabis companies will likely specialize in marijuana for medical or recreational purposes. At the moment, pot and brand producers in Canada are all medical cannabis companies – or do not make any sales.
There is an existing sophisticated system for the production and distribution of medical drugs throughout the country and for export. After October 17th, it remains to be seen which companies will be able to succeed in the leisure market. There is no guarantee that Coca-Cola will become a pot, and some could be more successful in selling medical cannabis.
In fact, not all companies wishing to make money with marijuana are turning to the leisure market, and some, such as GW Pharmaceuticals, are becoming something more like a drug company. as a recreational cannabis producer.
How much cannabis do they grow and at what price?
Each major Canadian producer indicates in his quarterly financial statements how much pot he actually grew and how much pot he sold. These numbers are critical as they demonstrate that the company can develop and sell the product that was once illegal.
As with most businesses, it is important for investors to be able to determine the cost of a product relative to its selling price. There is no standard way to do it. Canadian regulators are not satisfied with the current disclosure level of cost per gram, among other reporting issues. In a notice sent October 10, Canadian securities regulators said that the current method used by many pot producers to calculate costs per gram was unclear and companies needed to provide more detail.
Many pot companies use the cost per gram metric, but this is not a perfect number, and it is not always clear which inputs are included. Some companies do not disclose the metric at all; at least one breaks it down into "cash cost" per gram. If a firm includes prices per gram, investors must compare quarter-to-quarter changes, but since this is not a standard figure, it is important to be cautious when comparing companies.
Energy is one of the most important inputs of any cannabis-producing society, as cannabis is an energy-intensive product that requires as much sun as vineyards. Low growth costs are also closely related to net income. In a CIBC research note released earlier this year, analysts were expecting a gross margin of about 60 percent and assuming that producers could generate about CA $ 3.60 per gram of revenue from government buyers.
How much cannabis can businesses grow?
While some large cannabis producers are already profitable businesses, the introduction of cannabis for recreational purposes should shift black market demand to the benefit of legitimate businesses. With CIBC forecasting retail sales of C $ 6.5 billion by 2020, companies will likely be able to sell much more pot than they currently produce. The question is, how much do they plan to produce?
Most of the major producers reveal their area under cultivation, as well as the amount of production authorized by the Canadian government. Investors must determine the new capacity they develop in order to determine when the company will have to use capital to grow.
What supply agreements do they have?
That's where the money is, at least for the moment. Cannabis companies have signed agreements to supply marijuana, in Canada and elsewhere.
Licensed weed growers are regulated by Health Canada, the federal department that grants certification for growing cannabis. Canadian legislation has allowed the provinces to decide how to distribute marijuana, as well as how the country handles alcohol sales.
Although each province has slightly different rules for cannabis sales, the agreements between the various provincial entities and the weed growers are essential. The information provided by the provinces is useful but incomplete. They announced supply agreements, but few details on actual purchases. Some provinces and companies have published the maximum amount of cannabis under the agreement that the province will buy, but there is no guarantee that this number will be achieved. All provinces list providers on their websites, although for international securities transactions filed with SEDAR, the Canadian version of the United States Securities and Exchange Commission's EDGAR filing system is the best choice .
At the present time, neither business nor government knows what Canadians will actually buy, what products will be successful or which brands will attract consumers. All producers will earn money from the first round of sales from various provincial authorities, but in the long run no one knows who will succeed.
Beyond domestic sales in Canada, there is a growing number of opportunities to export cannabis or to settle in countries legalized by marijuana for medical purposes. Most major Canadian companies have foreign interests, whether they are supply contracts or expanding facilities, particularly in large, sophisticated medical markets such as Germany. Agreements with international pharmaceutical companies for distribution are also worth mentioning.
What intellectual property do they possess?
The Canadian system for the treatment of marijuana for medical purposes has been around for years, but recreational use by adults has led to an arms race to develop and patent new drugs. methods of cultivation, ripening and processing. Some companies disclose the number of patents and some do not, but companies with intellectual property rights that other companies will want to license should see their ratings increase.
As in other sectors, the bottom line is that investors are looking for companies that are developing leading-edge or fundamental technology for the future of the cannabis industry, a technology that competitors will have to pay to use it.
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