Industry researchers project International spending on legal cannabis to increase to $32 billion from $9.5 billion or 320% by the year 2020. Research projections disclosed that almost $23 billion can originate from the United States if more states vote to legalize marijuana. Nevertheless, Canadian cannabis stocks rose following the passage of a bill in Parliament legalizing recreational marijuana.
Principal Competitors in the Cannabis Industry
Marijuana has emerged as big business in the United States and Canada. Yet, potential investors must recognize the current market situation in these two jurisdictions.
A basic comparison between stocks of cannabis producers in Canada and their counterparts in the United States shows a glaring difference. Canadian cannabis stocks have displayed an impressive performance following the legalization of medical cannabis as investors projected considerable sales after everything is legal.
According to DailyMarijuanaObserver.com. the top 10 licensed producers in Canada that surpassed competitors in 2017 are the following:
- Cronos Group
- Aurora Cannabis
- CannTrust Holdings
- Emerald Health Therapeutics
- Aphria Incorporated
- Canopy Growth Corporation
- DOJA Cannabis Company
- MedReleaf Corporation
- Hydropothecary Corporation
- Beleave Incorporated
The first five companies revealed an aggregate sale of C$67.4 million in the latest quarterly report.
In contrast, cannabis stocks in the United States have fallen behind Canada because of the federal prohibition on marijuana under the Controlled Substances Act or 1970 Federal Comprehensive Drug Abuse Prevention and Control Statute. Investors planning to compete in the thriving American marketplace must contend with legal and regulatory concerns.
From this perspective, Canada appears to control the global market in terms of progress although the US market presents many opportunities for investors.
Major Differences in Cannabis Stock Valuation
Significant differences emerge in evaluating theoretical values and cannabis stocks of the United States and Canada. The US federal government’s ban on marijuana remains a negative factor. It increases the threat of possible legal sanctions, prison sentences, and seizure of assets aside from the likelihood of capital expenditures.
Canadian firms managed to lock in mortgages at very low rates. On the other hand, US enterprises find it difficult to secure mortgage debts. Limited Partnerships in Canada have easier access to equity capital while US LPs must cope with higher capital expenditures to earn better ROI.
US businesses must overcome the burdensome 26 US Code Section 280E, the federal decree that stipulates enterprises engaged in the transport of Schedule I and II controlled substance (referring to cannabis) cannot take tax credits or deductions. They are mandated to pay taxes on all earnings minus benefits of using business expenses to lower taxable income.
The National Cannabis Industry Association produced a Whitepaper explaining Code Section 280E and its effects on these companies. However, the statute can increase effective or average taxation rates to roughly 80% or higher because of cannabis firms’ failure to deduct operating expenses.
US/Canadian Cannabis Valuation of Stocks
US-focused firms own the lowest market caps. Revenues are not the only standards. Yet, some of these companies earn higher revenues compared to their Canadian contemporaries relative to existing market caps.
Take the case of the American Company Terra Tech which operated in California as well as Nevada and Organigram, one of the more popular Limited Partnerships in Canada.
Terra Tech reported total income of $8.6 million ($7.3 million connected to cannabis and the remainder to herbs and other crops) at the end of the 1st quarter of 2018. For the fiscal year 2018 (2nd quarter), Organigram earned sales of only $2.5 million, a small percentage of the Terra Tech output.
Terra Tech claimed sales higher than the Canadian company with cash burn (rate spent for venture capital to fund overhead before generating positive cash flow from operations) 280% higher. Despite lower sales, Organigram gained significantly higher valuation of $530 million than the $190 million of Terra Tech.
Another vital measure is price compared to tangible book value or net tangible assets/equity. Terra Tech reported total equity of $85.7 million with only $29.6 million or a ratio of 6.4 X left after deducting intangibles and goodwill. Organigram’s tangible book value was around $123.8 million (ration of 4.3 X) which is quite lower. However, Terra Tech can reduce the gap if it raises additional capital in the future.
One of the trends in Canada includes increasing tangible book value by means of capital upgrading. Limited Partnerships have ramped up their balance sheets by selling equity at a premium to book value. Terra Tech adopted the process by issuing convertible notes.
Canadian Legislation of Recreational Cannabis
Canada’s legislative chambers approved the Cannabis Act making recreational marijuana legal effective October 17, 2018. As a result, cannabis stocks surged after this landmark approval. Prominent cannabis enterprises traded at the New York Stock Exchange (NYSE), NASDAQ, and Toronto Stock Exchange upward between 2.4% and 6%. During this period, the stocks that stood out were the following:
- Aphria – 4.2% increase
- Canopy Growth – 6.4% increase
- GW Pharmaceuticals – 2.4%
- Aurora Cannabis (Vancouver) – 4.3%
- Cronos Group – 5.25%
- MedReleaf – 3.6%
The North American Index responsible for tracking 41 constituent companies with a total market value of over $36 billion rose 2.25%. This figure is considered a decline from the Index’s three-year high. The bottom line is the real value of these cannabis firms has settled in share prices following years of continuous evolvement toward legalization of marijuana in the United States and Canada.
Compared to the North American Index which gained 150% during the past year, the broader American stock market appraised by Standards and Poor 500 experienced an increase of only 14%.
OTC Canadian Stocks
Some of the companies that potential investors can consider trading in Over-the-Counter markets (Canadian stocks) and their corresponding market cap are the following:
- Canopy Growth Corporation ($6.10 billion) It is listed in the NYSE.
- Aurora Cannabis ($5.33 billion) Aurora first appeared at the TSX or Canadian Venture Stock Exchange.
- Aphria ($2.53 billion). The stock gained only more than 146% over the previous year.
- PharmaCan Capital/Cronos Group ($1.37 billion) This company’s stock gained almost 502% in 2017.
- Hydropothecary Corporation ($965.05 million) The company is acknowledged as the only licensed producer of medical cannabis in Quebec. Hydropothecary’s stock was up 203% last year.
- Organigram ($714.11 million) The stock showed a return of nearly 145% in one year.
- CannTrust Holdings ($907.72 million) stands as one of the most prominent pharmaceutical corporations in Canada. Its stock went up 4.2% during the past year.
- Supreme Cannabis Company ($441.64 million) The stock continues to slide this year after making gains in 2017 with a return of only 3.6%.
- Emerald Health Therapeutics ($571.38 million) Emerald’s stock had been on an upward trend incurring almost 262% in one year.
- Namaste Technologies ($440.39 million) Namaste concentrates on the electronic commerce side of the medical cannabis enterprise. The company’s stock shows an impressive 542% in 2017.
US Marijuana Stocks
US cannabis stock market shares have not encountered the same outlook or luck because of its illegal classification. The stocks cannot list on reputable stock exchanges like NASDAQ or NYSE. Companies list US-based stocks in less respectable OTC exchanges. Assets cannot be converted to cash easily.
This is the main reason look to North America for listing shares like the Canadian Securities Exchange (CSE). Becoming publicly-listed or moving to the CSE turns out as the viable option for American operators. This approach offers the fastest way of raising capital. It does not mean however that acquiring funds through venture capital has not been possible for US cannabis players. The process is simply less effective compared to listing through reverse merger or IPO.
The biggest US-based marijuana listing took place at the CSE after US cannabis retailer MedMen Enterprises went public through reverse takeover or IPO with Cormark Securities. The first round of funding amounted to around $110 million with a company value of more than $1.6 billion. MedMen ranks as among the largest investors in cannabis shares in Canada.
Since then, MedMen has 12 shops in California, New York, and Nevada after it opened one upmarket retail clinic in California in 2016 as well as four cultivation facilities. The company’s newest funding garnered from the CSE listing allows the company to expand within the United States and Canada’s recreational market.
At present, Pot Network (https://www.potnetwork.com/news/these-are-5-best-us-marijuana-stocks-buy-right-now) identified the top five US Marijuana stocks for trading.
- Terra Tech Corporation which hopes to dominate the California market.
- Kush Bottles that started as a packaging firm and now a full-fledged marijuana technology firm that partnered with Summit Innovations, a hydrocarbon energy operating in Colorado.
- Medical Marijuana Incorporated with its subsidiary HempMeds that focuses on CBD research.
- Friday Night Incorporated with its subsidiary Cana Hemp which made total sales of $5.4 million in the USA alone.
- Scotts Miracle Glo-Company listed in the NYSE and trading at an average of $80 per share.
Amazing Progress of Cannabis Stocks
The cannabis industry has become more enticing with new transactions happening almost daily. Mergers and acquisitions reached an all-time peak. Meanwhile, investments topped $5 billion so far in 2018, according to Viridian Capital Advisors’ forecasts. Sales may go over $9.5 billion before the end of the year based on statistics from Ney Frontier Data analytics firm.
Two large Exchange Traded Funds namely, Horizons Marijuana Life Sciences Index ETF (OTC: HMLSF) (TSE:HMMJ) and ETFMG Alternative Harvest ETF (NYSE:MJ) trade on major stock exchanges. Enterprises such as Cronos Group Incorporated (NASDAQ:CRON) and cannabinoid-based biotech GW Pharmaceuticals PLC- ADR (NASDAQ:GWPH) listed on the Nasdaq. Canopy Growth Corp listed on the NYSE recently.
Investing in cannabis stocks has not been confined to producers or retailers. Many companies deliver ancillary services in this industry. Pharmaceuticals, as well as biotech businesses, manufacture cannabinoid-based medications. Service and commodity providers used to operate outside the industry have jumped into the bandwagon because of legalization.
Corporations not permitted for listing in NASDAQ or New York Stock Exchange sought alternatives for raising capital by going public in Canadian stock exchanges. Others choose to trade on OTC American exchanges since publicly-listed firms do not experience the same level of inspection that the Securities and Exchange Commission or major exchanges impose.
The downside is OTC exchanges do not have the same reputation or credibility compared to primary exchanges. These facilities also enable more latitude when it comes to quality of the companies trading in their exchanges. Given this scenario, not all penny stocks should be avoided says some investment bankers. There is a bias against low-priced shares. The best way is to split stocks, own fewer shares, and higher prices.
Risks Confronting the Legal Cannabis Industry in Canada
Despite the legality, a few risks remain for the legal marijuana in Canada.
One is regulation. Lack of regulations can cause disruptions to the legal weed business. Driving under the influence of marijuana presents one problem because the Senate or the House of Commons has yet to pass a bill about this matter.
For investors, the enactment of the C-45 Bill presents an opportunity for businesses in the local medical and recreational cannabis market to generate profits. Marijuana stocks can prosper given the demand and chance of exporting marijuana products to international markets.
Once Health Canada, the federal government agency supervising the rollout of legal cannabis, permits growers to engage in licensed production, the per-gram cost of dried marijuana has the potential to go up as well. The disadvantage is if the price increases more than the ceiling.
Another risk is a long-term oversupply of weeds due to the legalization of marijuana in Canada and several states in the United States. However, the surplus will benefit consumers because of the decrease in gram prices of marijuana. Some projections state the combine production in Canada can reach 2.5 million kilograms every year at the end of 2020.
At this point, investors can draw the line between Canada’s cannabis producers and those from the United States before putting in their hard-earned funds.
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