The legal marijuana industry has been one of the hotter industries in the past couple of years, and investors are taking notice. A majority of marijuana stocks have seen their valuations double or triple over the past year. The most glaring reason for the growth is the underlying sales of legal weed. ArcView a premier cannabis research company, noted the growth in the North American market of 30% in 2016 to $6.9 billion. Even more interesting, it sees compound annual growth pacing roughly 26% per year through 2021. If this holds true, the North American legal-weed market would be worth $21.6 billion by 2021.
At the forefront of the growth is a major shift in the way the public views marijuana Gallup, which has taken polls on American’s views of cannabis for a 47-year period, found last year that 60% of its respondents were in favor of seeing the drug legalized nationally. Back in 1995, that number was at just 25%.
With public advocacy growing and sales clearly heading upward at a quick pace, it;s time to start taking pot stocks seriously. If the cards fall a certain way, Canopy Growth Corp, Aphria, Aurora Cannabis, and MedReleaf could all be top marijuana stocks to buy in 2018. It is worth noting that all four of these companies are Canadian medical cannabis producers.
So why Canada, when the U.S market could reasonably outperform our neighbors to the north in aggregate recreational-weed sales? There are three main reasons. Firstly, Canada is one of just a handful of countries around the world to have legalized medical cannabis, doing so back in 2001. Since medical marijuana is legal, publicly traded companies are able to generate growing sales and, in some cases, profits just from the medical side of the equation. For instance, in May, health Canada announced that the number of eligible medical marijuana patients was growing at 10% per month.
Secondly, there’s a real possibility that Canada would become just the second country in the world behind Uruguay, and the first developed country, to legalize recreational marijuana by July 1, 2018. Prime Minister Justin Trudeau introduced legislation in April that would allow people aged 18 and up to buy weed legally, through provinces would be allowed to increase the minimum age. According to Canadian officials, recreation marijuana could add $5 billion to $7 billion in annual sales and would boost Canadian marijuana stocks.
The third factor to consider is that each of these weed stocks, with the exception of Aurora Cannabis, has been profitable with some consistency. Canopy Growth was profitable through the first three quarters of fiscal 2017 and only wound up losing money for the year because of acquisition-related expenses. Aphria, which wound up losing money in the fourth quarter as a result of its heavy investments in its phase 4 expansion project, still produced a full-year profit in fiscal 2017. The same can be said of MedReleaf, which has been consistently profitable for the past two years.
To make things even better, all four Canadian pot stocks are ramping up their capacity to grow weed. Canopy Growth has primarily been doing this through acquisitions, including Mettrum Health, which was completed earlier this year. Without having to do as much in terms of developing grow farms, Canopy holds an advantage over its peers in terms of production capacity and readiness. It’s also one of just a small handful of Canadian growers that’s been given the green light to export dried cannabis to foreign markets such as Germany, where medical cannabis is also legal.The other three are focusing on organically expanding capacity. Aphria’s aforementioned $100 million-plus phase 4 project should yield 100,000 kilograms of dried cannabis annually once completed. It, too, has benefited from being able to ship dried cannabis to legal medical markets such as Germany.
Finally, MedReleaf, which recently went public in May to raise capital for its expansion efforts, has been focusing on its Bradford facility in Ontario. MedReleaf is actually the cheapest marijuana stock of all on a forward P/E basis, and that has a lot to do with its high market share in the cannabis oils space. Cannabis oil has a higher price point and margins than dried cannabis, so its focus on a more affluent user appears to be paying off.
It is important to keep in mind that there is still no guarantee that recreational marijuana will be legal in Canada when it is all said and done. There’s still a lot of opposition from conservative members of the parliament, and clear concerns from provincial mayors about getting enough police and regulations in place before a July 1 launch. Within parliament, conservative lawmakers have shared worries about adolescent access to marijuana if a home-grow option is included, while others have opined that driving under the influence laws aren’t tough enough, or haven’t been properly outlined.
Investors are also concerned that their holdings could continue to be diluted, This is due to recreational marijuana still being illegal throughout North America as of now, and most banks want absolutely nothing to do with pot companies. Marijuana stocks have had little choice but to seek bought-deal offerings or common stock offerings. This has resulted in a ballooning in the outstanding share count of all of the aforementioned companies, save for MedReleaf, which just went public.
The rapid growth rate of marijuana stocks can no longer be ignored. This upcoming year could be a great time for aggressive investors with a high tolerance for risk to consider one or more for their portfolios.