Earlier this year, Canada’s prime minister Justin Trudeau announced legislation to legalize recreational marijuana in 2018. The proposed legislation has support from both political parties and a majority of Canadian citizens.
Medical marijuana has been legal since 2001 and this would make Canada the first industrialized nation to fully legalize recreational cannabis nationwide.
Initial Rules
The initial rules are tight. Edibles will remain illegal. The age of legal consumption will be 18, but provinces may raise that age if they choose. Also, vaporizing and concentrates are not as widely popular as they are in America, and vape pens are not widely available through legal channels.
But there are some benefits as well. Most provinces own the liquor stores and the same is expected of cannabis dispensaries as well. This will provide an important level of quality control.
American tourists will also be able to buy cannabis in Canada and it’s a good possibility that Amsterdam-style coffeehouses might open as well. This will greatly boost tourism opportunities.
Marijuana Stocks to Watch
One definite benefit that has been noticed right now is marijuana stocks. Beginning with the announcement of pending legislation, stocks in the industry soared. Investors are rushing to get in on the ground floor of what could be a windfall financial opportunity.
Specifically, three Canadian medical cannabis companies have been expanding their growth operations over the past three quarters. If the legislation passes as expected, they could see huge financial benefit. These stocks, traded on NASDAQ, are Canopy Growth Corp., Aphria, and Aurora Cannabis.
Canopy Growth Corp
The largest of the three by market cap is Canopy Growth Corp., which has expanded mainly through acquisitions.
When they acquired Mettrum Health for $430 million, it gave them access to half of the country’s medical cannabis users.
The production capacity of the company is spread across six licensed facilities. This spelled a year-to-date revenue through Q3 of 2017 of $25.2 million. This is roughly a 230% increase from the same period the prior year.
Aphria & Aurora Cannabis
Not to be left out, Aphria and Aurora also got into the expansion game.
In late November, Aurora announced the start of construction on an 800,000-square foot production facility. Called Aurora Sky, it will be the most technologically advanced cannabis production facility in the world. The company also managed to acquire a 40,000 sq. ft. facility in Quebec.
Aphria’s board also recently announced a fully-funded project to increase production capacity from 300,000 plants to 1 million plants. The project, billed at approximately $137 million, is expected to be completed within the next 12 months.
This will put the company in line to be able to handle the expected surge in demand that the proposed legalization will bring in 2018.
Current profitability is one thing, but continued profitability is another entirely.
Both Canopy and Aphria are well placed and already generated positive earnings before interest, taxes, depreciation and amortization. Both companies are expected to be profitable on a regular basis by the end of the current fiscal year.
Investors should be cautioned, however, that the current prices for these companies are exceptionally expensive. And it is yet to be seen if their current fundamentals will, indeed, catch up with their valuations.
One stock to watch, however, is Aphria, who has fully funded its projects and is already profitable. Since it is still smaller than Canopy, it might just offer the most potential for long-term growth.
Stocks are always a risk; however, these three may benefit tremendously if the legalization goes through as expected.
With the initial cost high and the nature of investments, it still might be worth pausing to consider the investment into these stocks, particularly if you want to support the industry and get in on the ground floor of a potentially good investment.
However, I should warn that cannabis stocks, even those with large market caps, are especially risky investments. Remember, the bill hasn’t passed yet!
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