Considered by some as the biggest multi-decade opportunity for investors right now, the Canadian government’s plant to legalize recreational cannabis use has certainly ignited the broader industry. By July next year, Canada is expected to have passed legislation allowing individuals to legally buy marijuana for recreational use adding creating one of the biggest market for the plant worldwide.
By now our regular readers will have already become familiar our views on medical marijuana and how investors looking for opportunities in this sector can profit significantly by taking advantage of various investment options. If you are not up to speed, we recommend reading this, this and this to get you started.
Earlier this year, a report from Archview Market Research revealed that North American marijuana sales grew 30 percent in 2016 to $6.7 billion and are expected to top $20.2 billion assuming a CAGR of 25 percent. It should therefore come as no surprise that a horde of investors have been attracted to this unprecedented prospect of growth which is almost impossible to find anywhere else in the current market.
In both the U.S and Canada, a massive number of startups has taken a dive into this once relegated corner of the market contributing to investor confusion as to where to zero in on considering there are virtually new cannabis based products popping up. Sadly, the general consensus is that the odds of most of these new companies failing appears spectacularly high for reasons which we’ll go into later in this article.
First, in order to draw an effective comparison between the two cannabis markets, we need to know where the broader industry has been, where it currently is and what is likely to happen in the long term. According to experts, the cannabis market is now taking a breather after months of rallying to astronomical highs which saw several companies quintuple their valuations.
From what we have observed so far, once recreational cannabis use is approved in Canada, the whole market could be upended with only a few viable players managing to actually make investors any money. To begin with, this can be explained by the fact that a huge number of cannabis companies are penny stocks trading on the OTC which means that investors are taking on more risk for potentially higher rewards.
It is therefore important to understand that not all markets are equal in order to reduce the amount of risk an investor faces when investing in specific pot stocks.
For example, in the U.S, the government made cannabis a state’s issue which means that a state has to first decide to legalize cannabis on its own before going on to establish cannabis programs while in Canada, cannabis has always been treated as a federal issue.
Since marijuana is classified as a schedule 1 substance in the U.S, researchers must receive approval from three government agencies namely NIIDA, FDA and DEA while in Canada they must seek approval for scientific exemptions from Health Canada for each compound of the cannabis plant they intend to study.
Two plays to consider
For investors hoping to profit from both medical marijuana and recreational sales in Canada, we recommend looking at Canopy Growth (TSE: WEED). Canopy Growth happens to be the country’s industry leader in medical marijuana with 58,000 registered patients according to its most FY2017 financial report. For more context, the company basically doubled its patient numbers compared to the previous year as sales increased 203 percent.
However, it announced a loss of $16.7 million for the year but as chairman and chief executive, Bruce Linton stated, “The aim is to be the best ready and the best positioned as 2018 hits.” The company has been focusing on production rather than seeking profit according to Linton in order to prepare for a marijuana market that will be underserved when prohibition is lifted.
Canopy Growth has continued reinforcing its dominant position in the cannabis market by opening its online store Tweed Main Street, which serves as the single outlet for all the company’s Tweed, Bedrocan and Mettrum patients.
In addition to this, Canopy also set up Canopy Rivers to operate a streaming operation whereby the company provides upfront funding to other producers in exchange for the rights to acquire a portion of their cannabis production, as well as Craft Grow line which gives other producers an opportunity to access the company’s platform and reduce the investment needed to set up their own retail operations.
One difficult question which faces investors however has to do with whether its current valuation is justified. With a market capitalization of almost $1.6 billion and being Canada’s only pot cannabis unicorn, pundits argue that there’s a real case of overpaying for growth here. We believe that these concerns are overblown and aren’t taking into account the impact of recreational sales that will come into effect by this time next year.
For investors in the U.S, it is nearly impossible to find a single stock that can give you access to the market and positioning for exploiting recreational marijuana sales in the way Canopy Growth does in Canada. For this reason we recommend looking at MassRoots (OTC: MSRT).
MSRT offers a unique way of tapping into the cannabis supply chain through its vast platform since it doesn’t actually handle the plant. With more than one million registered users, the company enables consumers to rate products and cannabis strains based on their effectiveness using the platform in turn helping other users to make informed purchasing decisions at their local dispensary.
In addition to this, MSRT offers its software to businesses for a fee of $500 – $2000 per month and considering that it currently caters to only 450 licensed dispensaries out of the licensed 1,700 according to Archview Market Research which sees this number growing to 2,800 by 2019, the potential here seems quite compelling. The company has in fact stated that it plans on expanding to 579 licensed dispensaries in Colorado and 40 in Alaska.
Finally, we consider MSRT an attractive play since when compared to other options such as those developing cannabis based therapies, it isn’t as richly valued and its platform gives it a wide reach will could prove to be essential if the U.S ever decides to legalize cannabis use on the federal level.
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