Cannabis legalization brings opportunity
Everyone’s talking about Canada’s emerging cannabis industry. It’s bigger than energy, bigger than the banks, bigger than telecoms. Right now, it seems to be all anyone can talk about.
Recently, one fledgling company hit a market capitalization greater than American Airlines or Canadian Tire.
On the face of it, this is absurd. Cannabis becomes legal in Canada in just over two weeks. No one knows what the size of the market will be or which companies will survive the shakeout that is certain to come. There’s no way of calculating the sales and profit these companies will generate, and the new rules announced by Ontario last week will make it even more difficult for producers to get their products into the hands of the public.
There are 22 cannabis companies listed on the Toronto Stock Exchange, with more on the Venture exchange. This may be only the beginning. U.S. producers in states where weed is legal are eyeing a TSX listing. Health Canada has licensed 118 companies to produce medical marijuana and some of those that are not public may decide it’s a great time to raise capital by issuing stock. The TSX has become the largest cannabis industry exchange in the world, and that’s likely to continue unless the U.S. legalizes the drug nationally (which will never happen as long as Donald Trump is President).
The current frenzy has been compared to the tech boom of the late 1990s, when investors were buying shares of any company with a half-decent story. We all know where that ended.
Which stock will go highest?
Canopy Growth (TSE: WEED, NYSE: CGC) is the current industry leader, thanks in large part to a huge investment by U.S. beverage alcohol giant Constellation Brands. You could have bought the stock a year ago at about $10 a share. It hit a high of $74.45 in early September before pulling back.
Canopy has a market cap of $13.6 billion. That’s more than profitable, well-established companies like Canadian Utilities, Agnico Eagle Mines, and George Weston. This is a company that had only $25.9 million in first-quarter 2019 sales and posted a net loss of $91 million ($0.40 per share) for the period.
That said, many investors have made a lot of money on this and other cannabis stocks. Whether that will continue remains to be seen now that the rules of sale are starting to become clearer.
When I first wrote about cannabis investing in this newsletter in January, I suggested the lowest risk approach was through the Horizons Marijuana Life Sciences Index ETF (TSX: HMMJ). It invests in a portfolio of cannabis stocks, thereby spreading your exposure over several companies. The price at that time was $19.90. It hasn’t been as spectacular a performer as Canopy by any means, but to date we have a gain of 22.4%, based on Friday’s closing price of $24.35.
Recently, HMMJ expanded its holdings, adding nine companies to the portfolio in a rebalancing. The fund now has 49 stocks and has reached a market cap of over $1 billion.
HMMJ remains a Buy but only for those investors who are prepared to ride out the turbulence in this industry.