What gold stocks have rallied since the US election? None of them?
Wrong!
There’s a whole bunch of them. And they’ve performed spectacularly.
But I must confess that these companies aren’t actually digging gold out of the ground. Instead, they’re growing it.
Of course, I’m referring to what’s been dubbed as “green gold” -- medical cannabis.
“Green gold” has now become a very fitting term for medical marijuana stocks, many of which have recently soared in value -- though they’re all experiencing a healthy correction right now.
So why exactly have these mostly small-cap stocks lit up Canada’s stock exchanges lately?
It’s simple. Just look to California -- the world’s most successful exporter of socially progressive culture. Whether it’s gay rights, environmental legislation, gender equality or even just dietary fads, California is ahead of the curve. And sooner or later, most other Western political jurisdictions follow its lead.
With this in mind, the Golden State -- which boasts the world’s sixth largest economy (even though it’s obviously not a sovereign nation) -- just voted in favour of legalizing recreational cannabis. And this is having a ripple effect all over the globe.
In fact it’s an impact that has been very tangible in Canada. Not only has it propelled cannabis stocks en-mass to much higher valuations; it also means that Canadian large-scale pot growers are now ideally positioned to capitalize on the expansion of an unstoppable social movement to other lands.
In the process, Canada’s leading growers are primed over the long-term to become vertically-integrated, multi-national powerhouses.
This will happen when much of Europe and other liberal-minded nations gradually succumb to “Californication” -- at least in terms of society’s growing acceptance of cannabis.
Exactly how will this paradigm shift favour Canada’s big producers?
Toronto-based medical marijuana analyst Daniel Pearlstein, who works for the investment bank, Dundee Capital Markets, explains:
“The longer it takes for U.S. federal law to deem marijuana legal, the longer the Canadian licensed producers have to establish more international partnerships and create higher barriers to entry,” he told the Financial Post.
From Zeroes to Heroes
So exactly how frothy has the action been in Canadian week stocks lately? Here’s a good example. One of Canada’s largest industrial-scale growers, Aurora Cannabis, rallied to a 700%-plus premium to its share price in early August (though its stock was languishing as cheap as $0.40 back then).
Until, recently most cannabis stocks had performed relatively poorly this year. Much of this was attributable to the federal government dithering about how best to go about legalizing recreational pot.
Furthermore, there’s currently less than 90,000 patients in Canada who are legally permitted to order their medical cannabis from licensed producers (LPs). (By the way, an LP is defined as an industrial-scale grower that is certified to produce large quantities of pharmaceutical-grade medicinal cannabis.)
Additionally, a good proportion of these patients are living on social assistance, which means that they can order their pot from certain LPs at deeply discounted “compassionate” prices (as low as $5 a gram). So it’s still a fairly tiny market in terms of its size and its dollar value.
Here’s a good example of how balance sheet metrics have typically underwhelmed investors: Aurora announced in early August that it had reached the $1-million-mark in monthly revenues the previous month -- from a standing start in January. Yet the irony was that its share price was trading cheaper at the time than it was in late 2015, which was when Aurora had zero revenues!
Meanwhile, as many as three dozen rivals (some private and some publicly-listed) are all jockeying for position to capture a sizeable share of Canada’s legal medical marijuana market.
Even though the medical market is sure to keep growing, it’s not the real reason why most LPs are expansion-minded. They’re gearing up for the big prize – the looming legalization of recreational cannabis.
That’s expected to become a reality in 2018 or 2019, according to some industry analysts, who include Vancouver-based Pacific International (PI) Securities analyst Jason Zandberg.
Interestingly, nearly 5.5 million Canadians already smoke pot, according to a 2015 poll that was conducted by Forum Research and was widely reported by CBC.
Amazingly, the poll found that an estimated 31% of the population -- totalling 8 million people -- are likely to embrace the advent of a recreational market. This would eclipse the medical marijuana sector and translate into a multi-billion dollar business.
Faced with such pent-up demand, Canada’s federal government has made it clear that it will finally introduce legislation next spring to pave the way for this new marketplace.
This milestone event is almost sure to power pot stocks to higher valuations as it will be seen as evidence that the Liberal Administration is serious about making good on one if its key 2015 pre-election campaign promises.
What’s Next?
Now that these stocks have had parabolic increases in their valuations, they are due for a consolidation for at least the balance of the year. First, they’re experiencing a big correction as they’re being targeted by short sellers. So they have already given up most of their gains since the California vote to legalize recreational pot.
After all, it’s not the performance of their balance sheets that’s sent their share prices to such lofty valuations. For instance, many of them are experiencing impressive sales growth but are not yet profitable.
In other words, they’ve all been rallying on the strength of pivotal political developments in Canada and California, rather than organic growth. Now those news events are behind us, there won’t be any more dramatic game-changing announcements for a while. So pot stocks will likely quieten down and may experience plenty of seasonal profit-taking before year’s end.
But next year is a different story. Expect plenty of upside action. I’ll explain exactly why in my next article.
The Cream of the Crop
Meanwhile, if you’re trying to differentiate between the good, the bad and the ugly in the cannabis stock space, here’s a few standouts that are widely regarded by industry analysts as being among the best of the bunch:
Canopy Growth Corp. (TSX: CGC) -- the behemoth among Canada’s three dozen or so Licensed Producers (LPs), Canopy is backed by serious institutional money and is well-established as the poster boy for Canada’s legalized medical marijuana industry. It’s also big enough to gobble up some of the competition to scale-up quickly and assert itself as a dominant player once recreational pot is legalized.
Aphria Inc. (TSX.V: APH) -- With supposedly the lowest growing costs for an LP in Canada, Aphria -- which is based Leamington, Ontario -- is well-financed and has the ability to scale-up to over 1,000,000 square feet of growing space. If this happens, Aphria stands to become a clear market leader.
Aurora Cannabis (TSX.V: ACB) -- An aspirant to becoming Canada’s top producer once prohibition ends, Aurora is already preparing to increase its growing capacity more than ten-fold to over 700,000 square feet. The company is headquartered in Vancouver but its growing facility is located just north of Calgary.
Mettrum Health (TSX.V: MT) --
Based in Bowmanville, Ontario, Mettrum is also gearing-up to scale-up as much as 20-fold to over one million feet of growing capacity to cater to the pending recreational market.
Organigram (TSX.V: OGI) Based in Moncton, New Brunswick, Organigram is very well-financed. Accordingly, it recently added a further 136,000 square feet of growing capacity to its operations. And the company’s ever-improving balance sheet reflects the popularity of its commitment to only growing organic pot.
Supreme Pharmaceuticals (CSE: SL) -- Based in Kincardine, Ontario, Supreme owns a 342,000-square-foot hybrid greenhouse and has a large war chest that will allow the company to scale-up quickly once recreational cannabis is legalized.
That’s all for now, folks! Feel free to email me if you have any valuable insights into Canada’s ascendant cannabis stocks or if there’s anything else you feel I should know about. After all, it’s my job to be as well-informed as possible at all times about this nascent industry.
A journalist and stock market commentator for 25 years, Marc Davis is also a medical marijuana writer for the Huffington Post and manages www.capitalmarketsmedia.ca. He can be reached at marc@capitalmarketsmedia.ca or at marc@bnwnews.ca