Canada would be the first among the Group of Seven nations to legalize recreational cannabis as Prime Minister Justin Trudeau has promised legislation could occur as soon this spring, putting a damper on the current black markets and leveling the playing field.
The licensed producers of medicinal marijuana in Canada will face a major supply and demand shortage for recreational users since the current number of patients who are seeking cannabis is already higher than what these companies can generate, said Jason Spatafora, co-founder of Marijuanastocks.com and a Miami-based trader and investor known as @WolfofWeedST on Twitter. This lack of supply will push Canadian marijuana stocks to new highs and IPOs will "see massive runs," he said.
"The current valuations have room for growth as speculation persists with a signal from PM Trudeau to create a completely legal market, which would cause public and private licensed producers to scale up their operations in order to meet a supply versus demand shortfall, the likes of which we have never seen," Spatafora said. "It's like having 30 brewery companies in the United States go public after Prohibition ended."
The recreational market could be available for consumers as early as 2018 once regulation of the products is set, creating more value for its shareholders as revenue doubles or triples.
Canada's nascent cannabis industry has the potential for large returns as their medical market is well-regulated and institutional buying has already sparked a rally in the overall sector as shares of Canopy Growth (OTCMKTS: TWMJF TSX: WEED) rose to CAD $13 a share from CAD $4 in October and Aphria Inc (CVE:APH) rose to over CAD $6 from CAD $3.40 in October.
"The investment banks are buying huge stakes at the current levels," he said. "The legalization of medical marijuana on the federal level in Canada means licensed producers were able to to take their companies public in a meaningful way compared to the U.S. companies that still won't touch the plant directly. Canada is doing what people would wish would happen in the U.S."
Since the passage of medical marijuana in Canada in 2016, the licensed producers have run into massive shortages to keep up with demand.
"The federal approval of recreational cannabis will create a rush on expansion of cultivation operations as well as much larger investments pouring into these facilities, which has already begun," Spatafora said. "Given that the approval process can take years, licensed producers will likely trade on future earnings on revenue multiples similar to Amazon."
The Canadian cannabis market has a "lot of room to run" once the legislation is approved, said Michael Berger, founder of Technical420, a Miami-based company that conducts research on cannabis stocks and a former Raymond James energy analyst. At the United Nations meeting earlier in 2017, Health Minister Jane Philpott said Canada's Liberal Party government will introduce a law in the spring to legalize recreational cannabis.
Some Producers Will Benefit More than Others
Even though recreational cannabis should be advantageous toward all licensed producers that are approved to sell it, some companies will benefit more, he said. Many licensed producers have already started expansion of current facilities or construction of new ones to prepare for the increased demand.
"Investors should focus on companies that are well capitalized, positioned and managed," Berger said. "During the last six months, over $500 million has entered the Canadian cannabis industry through bought deals and private placements as companies focus on increasing production capacity prior to the legalization of recreational cannabis."
Opportunities to invest in private companies such as the Green Organic Dutchman have generated "great interest" from investors as the company possesses one of the largest licensed land lots in Canada as well as "one of the most attractive valuations when compared to its peers," he said.
Aphria (OTCMKTS: APHQF) is focusing on a different approach as this licensed producer recently acquired 200 acres in a separate location in Canada. This is less attractive than the acquisition by the Green Organic Dutchman since the property will need its own license from Health Canada, Berger said.
Health Canada, the federal regulatory department, said a licensed medical cannabis producer which acquires a property which is adjacent to its licensed facility does not need to receive a new license. Purchasing properties elsewhere will require the approval for a new license, which could hamper the construction process.
Companies Positioned for Growth
Canada's medical cannabis market is facing a supply shortage as the number of registered patients increases by double digits each month and there are currently more than 100,000 registered patients, said Berger.
Other licensed producers which have started to increase capacity include Aurora Cannabis (OTCMKTS: ACBFF CVE:ACB) and OrganiGram Holdings (OTCMKTS: OGRMF CVE:OGI). In November, Aurora broke ground on an 800,000 square foot production facility which is expected to be completed in the second half of 2017. OrganiGram recently acquired a ten-acre property adjacent to its existing facility.
"Aurora's hybrid greenhouse facility is expected to be the largest, most advanced and most automated cannabis production facility in the world," he said. "The facility will be able to produce more than 100,000 kilograms a year and it is located on 30 acres of leased land in Alberta."
Selectivity is Key
Attractive valuations and an influx of capital to capitalize on potential growth is what sets apart the various companies.
"Some of the factors which make the Green Organic Dutchman an attractive opportunity is its strategic partnerships with renowned companies like Eaton, Ledcor and Larseen Greenhouse, its attractive valuation, its sound financial structure, its proven management team, and its best-in-class infrastructure.
"Canada's legal recreational cannabis market should be generating over $10 billion a year and will serve over three million people in 2018," Berger said.
Acknowledgement: https://goo.gl/eNwbsRSource: https://goo.gl/Zhm6os
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