All you need to know about investing in Canadian marijuana stocks – The Motley Fool

Marijuana stocks have become a hot commodity in the past two years. And there is a country especially where stocks are the hottest: Canada.

Canada has become the center of attention of the United States. marijuana industry because, unlike the United States, marijuana is legal at the federal level. The country's cannabis industry has exploded, with many marijuana stocks in Canada.

What's happening now with marijuana in Canada? What are the threats to the cannabis industry? What are the best ways for investors to take advantage of the growing marijuana market? Here's everything you need to know about investing in Canadian marijuana stocks.

Overview of the Canadian Marijuana Market

The first thing investors need to know is that there are two Canadian markets for marijuana: medical marijuana and marijuana for recreational purposes. Canada legalized marijuana for medical purposes in 2001. However, the current regulations were aimed at patients who grow marijuana for medical purposes.

In 2013, however, the new regulations known as the Marihuana for Medical Purposes Regulations (MFNR) radically changed the way we obtain marijuana for medical purposes. Under these regulations, Canadians could no longer grow marijuana at home, but instead needed to obtain medical marijuana from authorized producers.

The MMPR did not stay in force very long. In February 2016, a Canadian federal court ruled that the regulations were unconstitutional because they prohibited Canadians from growing marijuana for medical purposes at home. As a result, another set of regulations has been adopted, the Medical Access to Cannabis Regulations (ACMPR), which retains authorized producers but also allows individuals to grow medical marijuana at home. . The ACMPR came into effect in August 2016.

In 2015, the then candidate, Justin Trudeau, promised to legalize and regulate marijuana for recreational purposes in adults when he was elected prime minister of Canada. Trudeau won the election. He also kept his campaign promise. The Canadian Senate voted one last time to legalize recreational marijuana on June 19, 2018. Under the Cannabis Act (also known as Bill C-45), Canadian adults will be able to buy marijuana in Canada. recreational purposes from October 17, 2018.

As is the case for marijuana for medical purposes, recreational marijuana will be provided by licensed producers or may be grown by Canadians for their own use. Canadian provinces are allowed to make their own regulations regarding the distribution and sale of marijuana for recreational purposes.

However, not all types of recreational marijuana will be allowed in October 2018. The rules allow the legal sale and use of dried cannabis, cannabis oil and cannabis seeds. However, cannabis-based edible products and cannabis concentrates used for vaping were excluded, at least temporarily. Health Canada, the federal agency responsible for public health in Canada, felt that more time was needed to develop regulations on these types of cannabis products. The finalization of these regulations is scheduled for 2019.

Impact of legalization

The number of patients receiving marijuana for medical purposes in Canada has increased rapidly to nearly 270,000 in 2017. This number is expected to reach more than 285,000 patients by 2018.

As a result, medical marijuana has become a relatively important business in Canada. Last year, total sales were estimated at approximately $ 600 million. However, it seems likely that medical marijuana sales will not continue to increase significantly and may even be somewhat absorbed by the opening of the Canadian market for legal recreational marijuana.

But the marijuana market for recreational purposes is expected to grow strongly. Arcview Market Research and BDS Analytics predict that recreational marijuana sales between October 17, 2018 and the end of the year will approach $ 700 million. By the year 2022, this total could reach nearly $ 5 billion.

The potential for significant sales has attracted more marijuana growers, even encouraging producers to convert greenhouses to marijuana growers. It has also attracted considerable interest in the Canadian market for recreational marijuana, with major beverage manufacturers seeking to market cannabis-infused beverages.

Changing relationships with banks

Although the Canadian marijuana market really began to flourish in 2013, fundraising has been a challenge for some marijuana-related businesses. Most banks do not touch marijuana growers with a 10-foot pole, fearing to be penalized for it. This left marijuana growers with limited options to obtain the capital needed to finance the expansion.

An alternative used by many marijuana growers was underwriting financing, a type of stock offering where an underwriter agrees to buy all the stock offered. These transactions often included warrants and convertible debentures – loans that could later be converted into shares. Some companies have also been able to obtain loans from credit unions.

Bank of Montreal (BMO) opened the door somewhat, however, earlier this year with its capital markets activities leading a round of financing by Canopy growth. BMO CEO Darryl White called Canopy "a good-faith company operating within the confines of the law." He also raised the possibility that BMO could conduct similar transactions with other marijuana companies, provided that they meet the bank's criteria for such transactions.

But it took the adoption of the Cannabis Act in July so that the banks could really work with the Canadian marijuana industry. BMO again led the charge soon after the law was passed by accepting a major borrowing facility for Aurora Cannabis (NASDAQOTH: ACBFF).

Threats to the Canadian marijuana industry

The increase in capital could continue to pose a problem to some members of the Canadian marijuana industry. Although banks are more willing to do business with major marijuana growers, this could be another story for smaller players.

There is also a lingering threat of how some marijuana companies have structured their underwritten financing in the past. Companies that used a lot of convertible debentures – loans that could be converted into shares – could face a time bomb. If investors convert these bonds into shares, the companies could be significantly diluted by the value of the existing shares.

The most worrying possibility for the Canadian marijuana industry is probably the possibility of an overabundance of supply in a few years time. Marijuana producers have been quick to increase their production capacity in anticipation of huge demand once the recreational marijuana market is open. The problem is that Canada's five largest marijuana growers alone are likely to have an annual production capacity greater than the most optimistic forecasts.

This perspective has led some members of the Canadian marijuana industry to plan a "compression" scenario. While supply catches up and exceeds demand, the laws of supply and demand dictate lower prices. Marijuana growers with higher production costs would likely have difficulties in this scenario. A natural consequence would be a wave of consolidation within the industry, while small producers are swallowed up at ridiculous prices by the biggest marijuana growers.

These problems could be exacerbated if the growth of the Canadian market for recreational marijuana is not as strong as expected. One of the possible ways to ensure that growth does not live up to expectations is that the Canadian government will not finalize regulations for edible products and cannabis concentrates next year.

The future of the Canadian marijuana industry

While the total marijuana market in Canada is expected to increase rapidly over the next few years, the true future of the Canadian marijuana industry is likely to focus on other countries. Many of Canada's major marijuana growers are already forming partnerships and establishing operations in Europe, Australia and South America.

Germany is currently the largest and most important marijuana market outside of North America. The country boasts the largest population of the European Union. Germany legalized medical marijuana last year. Most of Canada's largest marijuana growers now have subsidiaries in Germany or partnerships with German medical cannabis distributors.

Arcview Market Research and BDS Analytics predict that global medical marijuana excluding Canada and the United States will total $ 3.1 billion by 2022. However, over time, this market may well exceed this amount. BDS Analytics CEO Roy Bingham believes the global cannabis market will reach $ 100 billion in the long run, even with no movement in Asia to legalize marijuana.

But the biggest loophole in the Canadian marijuana industry is what's happening in the southern neighbor of the country. The United States still has federal laws prohibiting the use and sale of marijuana. However, medical marijuana is now legal in 30 states plus the District of Columbia. Nine states plus OC have legalized recreational marijuana. And these numbers are likely to increase as four more states vote on the legalization of medical or recreational marijuana in November.

Canada's leading marijuana growers are still out of the United States for the time being. All of the larger marijuana companies have their shares listed on the Toronto Stock Exchange, which prohibits their members from operating in areas where marijuana is illegal at the federal level.

However, the possibility exists that the United States may change its laws. Senator Cory Gardner, a Republican whose state of Colorado allows the legal use of marijuana for medical and recreational purposes, is promoting a two-party bill that would prevent the federal government from interfering with states that have legalized marijuana. President Trump said he would probably support this legislation.

If the laws were to change in order to allow Canadian marijuana growers to expand to the United States, the future of the United States will be over. industry could be very promising. The projected US market for cannabis in 2022 is almost three times the size of the combined marijuana market in the rest of the world, including Canada.

Different Ways to Invest in Canadian Marijuana Stocks

There are three main approaches to investing in Canadian marijuana stocks:

• Buy stocks of marijuana "pure play"
• Buy shares of companies outside the marijuana industry that have links with the industry
• Buy Exchange Traded Funds for Marijuana (ETF)

"Pure play" marijuana stocks are those companies that derive all or substantially all of their income from the cannabis industry. Investing in these stocks involves significant risk because of the threats mentioned above. However, stocks also have the potential for good returns – especially if global marijuana markets open up faster than expected.

For investors who want to get into the Canadian marijuana industry without taking so many risks, buy shares of companies that have connections to the industry but do not have it directly. Perhaps the best example of this type of stock right now is Constellation Brands (NYSE: STZ). Although Constellation Brands is a large alcoholic beverage company, it is present in the cannabis industry with its multi-billion dollar investment in Canopy Growth.

Companies like Constellation Brands see an opportunity to create a new class of cannabis-infused drinks. Constellation and Canopy, for example, plan to develop a wide variety of low-calorie beverages mixed with different cannabinoids. Some of these drinks are nutraceuticals containing cannabidiol (CBD), which has medical benefits but is not psychoactive. Even the drinks giant Coca Cola would be interested in developing CBD-infused drinks to relieve cramps, inflammation and pain.

ETFs allow investors to buy a basket of marijuana shares. The purchase of an ETF allows investors to spread their risk across a large number of stocks. However, the disadvantage of ETFs is that they charge annual fees that investors do not have to pay when they buy individual stocks. There are currently two major marijuana-focused ETFs whose holdings consist primarily of Canadian marijuana securities: Horizons Marijuana Life Sciences ETF and ETFMG Alternative Harvest ETF.

Top 5 Canadian marijuana stocks

What are the best Canadian marijuana titles? It depends on your definition of "best". Key elements to look for in a pot stock are production capacity, preparation for the Canadian market for recreational marijuana, and positioning in the global market for medical marijuana. Given these criteria, here are five of Canada's top marijuana titles.

Data source: Yahoo! Finance. Market capitalization as of September 24, 2018.

Canopy growth

Canopy Growth does not boast its annual production capacity. However, the company claims 3.2 million square feet of licensed crop space, which is enough for Canopy to comfortably produce at least 500,000 kilograms a year. The canopy is expected to be in great shape for the Canadian marijuana market for recreational purposes, with supply agreements with all provinces and territories to finalize the agreements up to now. The company's relationship with Constellation Brands is also a beautiful feather in his hat. Canopy has extensive international activities, including its subsidiary Spectrum Cannabis in Germany.

Tilray

Tilray expects to have 912,000 square feet of space growing by the end of 2018. The company has entered into recreational cannabis supply agreements with eight provinces and territories until the end of 2018. now. Tilray is the first marijuana producer (and for the moment only) to have been selected to supply both cannabis flowers and cannabis oils in Germany. It was also the first marijuana stock to be listed on the Nasdaq Stock Exchange. (Although Cronos Group was listed on the Nasdaq before Tilray, it was first marketed in Canada.) The company could be a potential cannabis partner for the Guinness beer maker Diageo.

Aurora Cannabis

Aurora Cannabis has been the most aggressive of the Canadian marijuana industry to make acquisitions. These agreements are expected to increase the company's annual production capacity to more than 570,000 kilograms by the end of 2019, once expansion projects are completed. Along with its peers, Aurora has entered into supply agreements with several provinces and territories, including the largest award, Ontario. He also has a stake in a large chain of liquor stores alcanna, with the two companies planning to open cannabis retail stores in Canada. Aurora is well positioned internationally with its subsidiary Pedanios in Germany and a large production plant in Denmark. In addition, Coca-Cola would consider Aurora as its partner in developing cannabis-infused drinks.

Aphria

Aphria is expected to have an annual production capacity of 255,000 kilograms in 2019. The company currently has supply agreements with eight provinces and territories for the marijuana market for recreational purposes. Aphria has also chosen Great North Distributors, the largest distributor of wines and spirits, as a partner for the distribution of its recreational cannabis products. It claims operations in Europe (including Germany), Africa, Australia and South America. Aphria could also be the best candidate to become the cannabis partner for Diageo.

Cronos Group

The Cronos Group stated in its second quarter update that the annual production capacity is expected to reach more than 40,000 kilograms for the Canadian domestic market by the end of the year. In addition, Cronos has formed a joint venture that could increase its annual capacity by 70,000 kilograms. The company has entered into supply agreements with four provinces and territories, including Ontario. A five-year supply agreement has also been signed with Cura Cannabis Solutions. Cronos has partnered with a US-based cannabis retailer MedMen open cannabis retail stores in Canada. It is also active internationally, with a partnership with the large German pharmaceutical supplier Pohl-Boskamp and a joint venture in Australia.

Is it time to buy Canadian marijuana stocks?

There is a lot of hype for Canadian marijuana stocks. Rumors about potential deals with other large corporations outside the marijuana sector add to the feverish expectations.

The problem is that the evaluations already seem to reflect extremely high growth expectations. Tilray shares, for example, are trading at nearly 400x sales. Aphria has the lowest price-to-sales ratio among the five most important values ​​discussed – and more than 125. Even if growth projections for 2022 are taken into account, the highest Canadian marijuana stocks are trade several times higher than other industries such as alcoholic beverages, health products and tobacco.

Canadian marijuana stocks are likely to experience significant volatility, largely because of their high valuations. Investors who prefer to avoid roller coasters with volatile stocks have an interest in staying away.

Over the long term, however, the global marijuana industry is expected to become large enough to provide strong growth opportunities for the most powerful competitors, including many of the titles mentioned. For aggressive investors who can withstand volatility and stay in the long run, some of the best marijuana stocks could be winning despite their astronomical valuations.