Investing in Cannabis
Over the past year, Cannabis has become one of the hottest and most talked-about sectors across world markets. Although it was not that long ago that the very notion of investing in the flowering herb meant you were running afoul of the law.
Because the recreational use of cannabis has been illegal in most Western countries since the 1930s, it’s been significantly under-researched by modern pharmacology. The situation has changed in recent times, however, as we’ve seen an increasing amount of research being published, supporting the medicinal benefits of the plant. Couple that, with exponential revenue generation for the current players in the sector, this could be an opportune time to invest in cannabis.
Cannabis has been more commonly referred to as “marijuana” and informally as “weed” or “pot”. There are two main properties of the cannabis plant, delta-9 tetrahydrocannabinol (THC) and cannabidiol (CBD). Both compounds interact with your body’s endocannabinoid system to impact the release of neurotransmitters in your brain. These neurotransmitters relay messages between cells about pain, sleep, stress, and many other functions.
Each compound interacts differently to produce different effects on the body. THC is the main psychoactive ingredient; it is the compound that generates the euphoric ‘high’ associated with recreational cannabis use. Along with recreational use, it has been used medically for its pain-relieving and relaxing effects. THC has been known to induce hallucinations, change thinking, and cause delusions. On average, the effects last approximately two hours and begin to take effect 10 to 30 minutes after ingestion.
Cannabidiol is one of the most critical cannabinoids within the cannabis plant. It exists both in agricultural hemp, as well as medical cannabis. While cannabinoids are present within several plants in nature, cannabis is the only plant known to contain CBD. It has almost an identical chemical formula to THC, differing only to the different arrangement of atoms. This slight variance causes THC to create a psychoactive effect, while CBD does not. This fact means that when you ingest CBD for medical purposes, you’re more likely to experience relief of your unwanted discomfort, with little or no noticeable effect on your cognitive abilities.
Research has shown that CBD may be useful in helping with pain (neuropathic, chronic, cancer-related); epilepsy; multiple sclerosis (MS); Parkinson's disease; broken bones; depression; diabetes; rheumatoid arthritis; anxiety; ADHD; schizophrenia; substance abuse and withdrawal, and heart disease. The fact that CBD is therapeutically potent as well as non- intoxicating, and easy to use as CBD oil, makes it an appealing treatment option for those who are cautious about trying cannabis for the first time.
There’s a lot of excitement about the healing potential of CBD, with good reason. In June 2018, the U.S. Food and Drug Administration (FDA) recognized cannabidiol as a real medicine by approving Epidiolex, an almost pure pharmaceutical CBD formulation, as a treatment for two severe pediatric seizure disorders, Lennox-Gas taut Syndrome and Dravet Syndrome.
Cannabis has been illegal in the US since the Marijuana Tax Act of 1937, but recently more and more states are legalizing cannabis. California became the first state to legalize medical marijuana in 1996, and shortly after, in 1998, they were followed by Alaska, Oregon, and Washington. In late 2018, Canada, after 17 years of seeing the benefits of medical marijuana, became only the second country in the world to legalize cannabis for recreational use.
In the United States, 33 states have now legalized the use of medical cannabis and recreational use is legal in 10 states. The legalized cannabis movement is growing quickly, and with it, so too is the opportunity to profit from the sector. Given that Canadian growers have been leading the field, there’s an opportunity to profit from this market. Green wave advisors estimate the industry could be worth $35billion by 2022.
Canopy Growth Corporation is our best pick (WEED.TSX). It currently has 4.3 million square feet of licensed growing capacity, almost double the 2.4 million it had in 2018, and remains on the path to exceed 5.6 million by the end of 2019. They can produce an estimated 500 tonnes of marijuana and they have grown from CAD$12.7M in sales in 2016 to $39.9M in 2017 and $77.95M in 2018.
Constellation Brands, the company behind Corona beer, has made a US$4 billion investment in Canopy Growth Corporation in 2018 and they did it at a 50% premium to the share price at the time. Constellation is already producing cannabis-infused beer, but they want help from the largest and most experienced grower to get it right.
Previously Canopy had long said it wouldn’t enter the U.S. market until there was a legal pathway to do so federally, and in December 2018 the US Farm Bill gave them exactly what they were waiting for.
On January 14, 2019, Canopy struck a deal with the State of New York, worth between US$100 and US$150 million, to establish a hemp industrial park that can process tons of hemp extract on an annual basis according to Canopy CEO Bruce Linton.
While the revenue impact for Canopy depends on how the FDA will regulate hemp-based products, Green Wave estimates sales of marijuana in New York will reach just under US$3 billion within five years. However, the market potential could be much bigger if the products were able to flow more easily throughout other states of America. Given the extensive distribution and marketing power that Constellation Brands brings to the table, this early step into the U.S. could be a game-changing move for Canopy Growth Corp. in the long run.
With over US$5 billion in assets on their books, 4.3 million square feet of growing space, and a 2018 Q3 fiscal report showing revenue up 282% on the equivalent figure for the year prior, it’s very hard to overlook Canopy Growth Corporation when you’re looking to invest in the Cannabis Industry.
Jacob Coombs, Investment Advisor, Capital 19