Table of Contents
- High price gains in 2018
- Canada allows cannabis as a stimulant
- North America leads the way in legalizing cannabis
- Gold rush atmosphere: a new branch of industry emerges
- The three best cannabis stocks
- Top-Cannabis Share #2: Canopy Growth Corporation: The Global Leader
- Top-Cannabis Share #1: Aurora Cannabis Inc. – Growth through billion-dollar acquisitions
- Where can I trade cannabis stocks?
Marijuana and cannabis stocks have been among the top performers on the stock market since mid-2017. No wonder, because more and more regions of the world are legalizing cannabis, at least for medical purposes. Germany is also one of them, as are more and more states in the USA.
High price gains in 2018
Some of the top players in the marijuana industry got really high in 2018… and grew outstandingly. At its peak, Aphria shares rose by up to +180%, Aurora Cannabis by +200% and Canopy Growth Corp by as much as +330%. However, in September 2018, all stocks in the industry were hit by a strong correction and lost 50% or more in value. The Aphria share was hit particularly hard, having already been hit hard twice due to accusations against executives and unexpected developments. The share price plunged by -79% at its peak from its highs in the autumn and has not recovered sustainably since then. The Cronos Group will, therefore, replace the Aphria share.
In cannabis stocks, the wheat is just separating from the chaff
However, a few stocks, including Canopy Growth Corp and Aurora Cannabis, have recently recovered significantly. After the initial hype, in which every share in the industry was bought blindly, the wheat is now apparently separating from the chaff. This makes the sector interesting again for investors and brings back memories of the “New Market” and the “Internet bubble”. Of the numerous companies founded, only the most viable and most significant were able to survive, while most small companies disappeared from the scene again. The “survivors” of the Internet hypes such as Amazon or eBay were able to make immense price gains in the following years. This scenario could also be exemplary for the cannabis industry, although despite all the euphoria, it is considerably smaller.
Beverage manufacturers and tobacco companies smell the big business
In autumn 2018, marijuana shares were boosted primarily by the strong interest of numerous large spirits producers. They want to bring beverages with the psychoactive substance found in cannabis, THC, onto the market as lifestyle products. Above all the Constellation Brands beverage giant, which stands behind the Corona brand, for example, increased its stake in the market leader Canopy Growth from 10% to 38% with a billion-dollar investment. But also groups like Diageo (e.g. Johnnie Walker and Smirnoff), the big brewery Molson Coors, Nova Scotia Liquor or Heineken have big plans in the cannabis market and forge alliances with cannabis suppliers. Even Coca Cola recently expressed thoughts about bringing cannabidiol (CBD) beverages to the market. CBD has a calming effect and, unlike the active ingredient tetrahydrocannabinol (THC), has no intoxicating effect.
But the weakening tobacco industry is also reaching for cannabis. The Marlboro manufacturer Altria acquired a 45% stake in the cannabis company Cronos for USD 1.8 billion, which was valued at more than CAD 4.5 billion. The interest can rise to 55% if Altria exercises all warrants granted and loosens a further CAD 1.4 billion.
Canada allows cannabis as a stimulant
Canada is the main focus of investor attention. There the medical use is already legal since 2001 and since October 2018, smoking weed is now officially legal. Canada is the first G7 country and after Uruguay the second country in which hashish has been released for private consumption. According to forecasts, the Canadian marijuana market will increase more than tenfold in the medium to long term as a result of the planned legalization. Therefore, the Canadian market is strongly in the focus of cannabis producers as well as investors.
North America leads the way in legalizing cannabis
But also in the USA, more and more federal states are legalizing marijuana, so that North America is leading the way worldwide in the legalization of cannabis. In the USA, for example, marijuana consumption has been legal since 2018 in California’s most populous state, as well as Michigan, Nevada, Maine, Massachusetts and Vermont. As a result, the unpunished use of cannabis is now possible in ten US states with a total population of over 60 million. Other federal states want to follow suit and estimates assume that a total of 18 states will be legalizing weed by 2020. In 33 federal states, consumption for medical purposes is already permitted.
USA: At federal level illegal, allowed in individual states
Nevertheless, cannabis is still considered a completely illegal drug at the federal level by the US authorities. However, drug-related offences are subject to state legislation, so states are free to deviate from federal law. The result is a patchwork of different regulations. In New York, for example, the possession of small quantities of marijuana should at least be decriminalized. Anyone caught there with up to 25 grams of cannabis will no longer commit a crime in the future, but will at best risk a comparatively low administrative fine.
US market promises immense market potential
In the long term, the US market promises the highest growth potential. According to experts, the volume of medical marijuana in these countries alone will rise from USD 10 to 11 billion in 2018 to USD 24 to 40 billion in 2021. Overall, i.e. including recreational use, analysts estimate that the cannabis industry in the US could grow from USD 11 billion in 2018 to USD 75 billion by 2030.
Majority supports the legalization of cannabis
According to a nationwide survey conducted by the Gallup Institute for several decades, over 68% of US citizens surveyed are in favour of legalizing marijuana in the USA. In the first year of the 1969 survey, only 12% of the American population was in support of cannabis release. According to Quinnipiac University, nine out of ten respondents voted for medical approval.
Tax revenues are bubbling up
Colorado and Washington show just how much the states are benefiting from the release: in addition to numerous jobs and cannabis tourists, tax revenues are also bubbling up. In 2016, Colorado already recorded $260 million in tax revenues from marijuana sales of $1.7 billion. Washington collected USD 319 million in 2017, around USD 100 million more than with alcohol taxes. And also in Michigan, where marijuana was last released, some USD 740 million in additional tax revenues are expected in the first year alone. Analysts at the ArcView Group expect that the cannabis market in the USA will generate a total of around USD 4 billion in new tax revenues by 2021. Besides, the analysis company expects approximately 400,000 additional jobs along the value chain. In California alone, 80,000 jobs have already been created, generating an income of USD 3.5 billion according to a study by ICF International.
Gold rush atmosphere: a new branch of industry emerges
The ongoing legalization and decriminalization of research, medicine, cultivation, processing, distribution and consumption are creating an industry worth billions, which is currently still in its infancy despite high investments. On the one hand, companies can look forward to high revenues, on the other side, changing legal situations and risks cannot yet really be overlooked at present. Investments in the cannabis industry, therefore, promise high-profit potential but are also associated with extremely high uncertainties and high risks. Investors should, accordingly, only bet a small proportion of their portfolio on up-and-coming companies and then invest in large in already established firms.
Cannabis stocks with wild price swings
The Global Cannabis Stock Index tripled from October 2017 to the end of 2017 alone and then halved again. Since then, the index has already risen again by +50%.
Tilray with Nasdaq-IPO: Course explosion in airy heights
The “bird shot down” was the small Canadian company Tilray. While several marijuana stocks in Canada and other countries have already experienced breathtaking highs, Tilray was the first company to go public on the US Nasdaq stock exchange in July 2018. The share was issued at 17 USD and after a few weeks reached a peak of 300 USD. This corresponds to a valuation level of no less than USD 28 billion. The price fell again in the following days and is now at approx. 46 USD. Nevertheless, the market value is still around USD 4.5 billion. Although the cannabis company, which has concluded a cooperation agreement with the drinks manufacturer Nova Scotia Liquor, among others, is likely to continue to grow strongly, the valuation of Tilray is still more than just ambitious.
Blatant overvaluation at Tilray
In 2018, the company generated a turnover of just USD 43 million. Sales, not profits, because even higher operating losses of USD 68 million were recorded. And even if the company – as expected by analysts according to Bloomberg – actually generates just under USD 350 million in sales in 2020, it will be challenging to grow into the current valuation and justify it. Even to achieve a high P/E ratio of 50, net income would have to rise to USD 90 million. Of course, the company is still “light years” away from this, so the overvaluation continues to be blatant. Other companies are rated similarly highly, but have enormous amounts of cash in their bank accounts, partly due to the entry of large partners.
Significant price fluctuations pre-programmed for cannabis stocks
Please also note the following: All forecasts for the development of the cannabis market in the coming years are subject to considerable uncertainty. Neither the growth of supply nor the actual demand of consumers can be reliably estimated. As countless suppliers are pushing their way onto the market, the stars are pointing to where the market price for cannabis will be. It is also quite possible that in the foreseeable future, the high investments will result in an oversupply of marijuana that will depress prices. High price fluctuations and fierce cut-throat competition then seem inevitable. The legal framework or taxation can also change rapidly according to the political mood and may lead to distortions and sharp price fluctuations in cannabis stocks.
Rely on established first movers
Companies that have several years of experience and have already positioned themselves and established themselves in the market will benefit most from the marijuana boom. If you still want to invest speculatively, you should not only wait for an explicit correction in the hot stocks but in any case, also have an investment horizon of several years. There is no doubt that there are clear signs of a bubble, as investors have been plunging for the past two years at almost every company that is even marginally concerned with cannabis. Select only shares of financially stable companies that have at least double-digit million sales. In addition to liquid share trading on the home stock exchange, you should also assume a market capitalization of multiple 100 million US dollars.
Please note that some marijuana shares can only be traded on the respective home exchanges in the USA and Canada. The Deutsche Börse put some shares of numerous companies that produce cannabis out of trading. The reason for this was a new requirement from Luxembourg, the headquarters of the settlement subsidiary Clearstream, where foreign shares are held. The country’s Securities and Exchange Commission classified trading in cannabis shares as illegal and therefore ordered the suspension for the time being. In Luxembourg, the use of cannabis has so far been banned, and this also applies to medical use. However, this may soon change again under the new government coalition, because there are also political efforts in Luxembourg towards medical legalization. At least for manufacturers of medical marijuana, there are already exceptions. The possession of cannabis shares remains, of course, still permitted in Germany, because in this country – as mentioned at the beginning – also the use for medical purposes is allowed.
The three best cannabis stocks
As a result of the market opening that has now been completed, Canada, in particular, is emerging as the hub of the industry. The Canadian government expects that 4.6 million Canadians will consume approximately 655,000 kg of cannabis annually and spend 4.5 to 6.2 billion CAD on it. Since the legal framework conditions for manufacturers were relaxed at an early stage, the largest companies in the industry are currently being created there.
In the following, we present the shares of three first movers from the cannabis industry, who already have a leading market position and are already worth billions. But keep in mind that marijuana stocks have been hitting the headlines since 2017 and have very obviously developed into a speculative bubble. Despite the price declines that have already taken place, there may, therefore, be further sharp price setbacks at any time.
The Canadian cannabis producer Cronos (ISIN: CA22717L1013 – symbol: CRON – currency: USD) is active on five continents with partnerships and joint ventures. Among other things, the company manufactures medical products, for example, under the “Peace Naturals” brand. In addition, the portfolio also includes brands for leisure consumption such as “Cove” and “Spinach”. In Germany, Cronos cooperates with the distributor Pohl-Boskamp, which supplies around 10,550 German pharmacies.
Although Cronos is not yet one of the top cannabis companies in terms of turnover, it already has a market capitalization of around USD 2.5 billion. In December 2018, Marlboro manufacturer Altria acquired a significantly higher valuation from Cronos. The tobacco company recently acquired a 45% stake in the company for USD 1.8 billion, equivalent to an estimate of approximately USD 4.5 billion. Also, Altria was given the option to increase its stake by a further 10% for just over USD 1 billion, thereby acquiring a 55% majority stake in the Canadian company. Altria was the first tobacco heavyweight to venture into the booming cannabis market.
Unexpected profit in the first quarter of 2019
In 2018, Cronos reported an increase in sales of +285% from USD 3.1 million (CAD 4.1 million) in 2017 to USD 11.7 million (CAD 15.7 million). The investment-related costs were significantly higher and led to a loss of around USD 14 million (CAD 19 million).
Cronos recently published its key figures for the first quarter of 2019. The analysts’ profit expectations were clearly exceeded. Earnings per share were USD 0.36 (CAD 0.48), while market experts had expected a loss per share of USD 0.026 (CAD 0.035). However, the gain resulted from a revaluation of the warrants held by Altria. In terms of sales, USD 4.8 million (CAD 6.5 million) was recorded in the books in the past quarter, slightly less than the USD 5.2 million (CAD 7 million) expected by analysts. Nevertheless, this was still around +120% above the previous year’s revenue of USD 2.2 million.
A positive factor at Cronos is the enormous cash position of more than USD 1.8 billion (CAD 2.4 billion) resulting from Altria’s investment. On the one hand, the share is thus exceptionally well backed with cash, as the cash component per share is a whopping USD 10. At a current share price of USD 14, the operating business is thus virtually for USD 4 or around USD 700 million. On the other hand, the cash reserves give the company sufficient leeway to expand further and, for example, significantly expand its currently limited production capacity. The company is already working on a considerably larger plant, which is scheduled to go into operation next year.
Following the sharp correction, the Cronos share has now reached an exciting price level for medium to longer-term purchases. Because in the range of 14 USD to 15 USD there is a critical support level on the chart. Besides, the cash backing of the share should provide a good hedge against further sharp price losses. With Altria behind it, the stock could again target prices in the range of USD 20 to USD 25 in the medium to long term.
Canopy Growth Corporation (ISIN: CA1380351009 – Symbol: WEED – Currency: CAD) now owns ten licensed production facilities for marijuana. With a current market capitalization of CAD 11 billion, the company is currently the largest listed marijuana producing group, which also describes itself as the world market leader in the fields of medicine and leisure consumption. The company from Smiths Falls in Ontario should also benefit, particularly from the opening of the Canadian market. In addition to North America, the company is already active in numerous other countries such as Australia, Spain, Brazil, Chile, Germany, Denmark, the Czech Republic and Jamaica. In May 2019, Canopy Growth completed the acquisition of the German C3 Cannabinoid Compound Company, the largest pharmaceutical cannabis company in Europe, for approximately 226 million euros.
Profiteer of the Canadian market opening
In the 2017/18 financial year, the strong growth of previous years continued and with CAD 78 million the past year’s turnover was almost doubled. As a result of investments, another loss of CAD 0.40 per share was recorded. In the first nine months of 2018/19, sales climbed by +140% from CAD 55 million to CAD 132 million, of which CAD 83 million was attributable to the third quarter alone. For the first time, the company sold more than 10 tonnes of cannabis in a single quarter. Canopy Growth had recently massively increased inventories for the Canadian market opening. Due to the opening of the Canadian market in the past quarter, Canopy Growth was the first company to achieve sales in the three-digit million range and is therefore also the largest beneficiary of the Canadian market opening.
A partnership with Constellation Brands, a global market leader in alcoholic beverages, which markets the internationally renowned beer brand Corona, is particularly exciting. As part of the cooperation, Constellation initially acquired a 10% stake in Canopy Growth at the end of 2017 and paid CAD 245 million for it. The beverage giant thus put its first foot in the door of the lucrative cannabis market. Beverages such as beer containing cannabis should be developed and marketed together in the near future.
In the middle of August 2018, a real bang followed. The spirits giant acquired a further 104.5 million shares directly from the company at a share price of CAD 48.60, increasing its stake to 38%. This corresponds to an investment of CAD 5 billion and a substantial premium of more than 50% on the share price at the time. The enormous inflow of funds is intended to strengthen further and expand the company’s position as a world market leader.
With a tenfold increase from less than CAD 7 to over CAD 70 since summer 2017, the share is one of the big winners of the marijuana hype. After the last billion-euro investment by Constellation Brands, the share shot up to new all-time highs and pulled almost the entire industry up with it.
Only suitable for very long-term investors
Canopy Growth is the undisputed world market leader with enormous financial reserves and will probably continue to grow strongly in the coming years. Nevertheless, the valuation remains very ambitious at CAD 11 billion. The excellent market positioning, the comfortable financial cushion of currently still around CAD 4 billion and the strong partnership with Constellation Brands, however, justify a premium over the competition. For this reason, it is particularly interesting for investors with a very long-term horizon to continue to hold the share.
With Aurora Cannabis Inc. (ISIN: CA05156X1087 – Symbol: ACB – Currency: CAD), the third share is also located in Canada. Although the Vancouver-based company had existed for several years, it was not until 2016, when the first license was obtained, that medical marijuana revenues were recorded for the first time. Aurora now has seven licensed production facilities and five licensed sales outlets.
In the first full year of production 2016/17, sales of CAD 18 million were achieved and in 2017/18, thanks to acquisitions, consolidated sales of CAD 55 million were already recorded, a tripling of the previous year’s sales. In the first half of 2018/19, sales rose again by a baffling +320% from CAD 20 million in the previous year to CAD 84 million due to the takeover. As with all three companies presented, the main focus is currently on the growth opportunities of the North American market. But the expansion into Germany, Italy and Australia is also running at full speed with the first deliveries already being made.
Ambitious growth plans: production target 570 tonnes
According to the company, the current production capacity was abruptly increased to over 32 tonnes per year as a result of the acquisitions of two major cannabis producing companies. The longer-term production target was also immediately increased from 400 tonnes per year to 570 tonnes. At prices of 8 CAD per gram, this would correspond to a turnover of no less than 4.5 billion CAD. A very ambitious goal.
After the takeover of competitors, Cannimed and MedReleaf, Aurora Cannabis bring a total market capitalization of currently almost 8 billion CAD on the stock market scale. Management originally wanted Aurora Cannabis to catch up with Canopy Growth and take over the world’s leading market position. The deal with Constellation Brands, however, seems to have severed the competitor for the crown of market leadership a good deal for the time being. Canopy Growth has several billion Canadian dollars in its bank account in addition to the significantly higher market value.
Aurora management strives for market leadership at all costs
The Canadian cannabis industry is currently in an excellent state with cooperations, shareholdings, capital increases and takeover bids, especially Aurora Cannabis. No wonder, since Canadian consumers have recently been allowed to own up to 30 grams of marijuana, so the country’s market volume is estimated to have increased tenfold. The declared goal of Aurora’s management, however, is still to chase away Canopy Growth as the market leader. The not exactly cheap takeovers of the two competitors Cannimed and MedReleaf for a total of 4.3 billion CAD have not yet brought the desired success in the scramble for the distribution of the marijuana cake.
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Steff has been actively researching the financial services, trading and Forex industries for several years.
While putting numerous brokers and providers to the test, he understood that the markets and offers can be very different, complex and often confusing. This lead him to do exhaustive research and provide the best information for the average Joe trader.