Sure, this week saw the U.S. throw a collection of rather unfriendly tariffs our way. But did you know, we’re stealing their marijuana industry right out from under them?
At least from a capital markets perspective, that’s exactly what’s going on.
You see, even though medical marijuana is legal in 30 states, and recreational is legal in 10, U.S. cannabis companies can’t list on U.S. stock exchanges because marijuana remains federally outlawed.
What to do? What to do?
Enter the relatively unknown Canadian Securities Exchange, or CSE, which some now refer to as the Cannabis Stock Exchange given 76 of its 379 listed companies are geared towards cannabis.
Because marijuana remains illegal at the federal level in the U.S., the largest operator of stock exchanges here, the TMX Group Limited (TO:X) has fallen in-line with its U.S. peers and does not allow U.S. cannabis companies to list.
The CSX (NASDAQ:CSX) has taken on a “more-the-merrier” stance, however.
Something that was cemented this week with the listing of MedMen (SNX:MMEN)
Valued at US$1.6 billion or so, MedMen’s CEO Adam Bierman describes the company as the biggest cannabis player in all of the U.S.
Based in Los Angeles, MedMen is perhaps best known for its retail outlets, which are said to resemble an Apple (NASDAQ:AAPL) Store. Located in high-traffic spots like Fifth Avenue in N.Y.C., Beverley Hills and Las Vegas, Bierman figures the company has established itself in the three most important cannabis markets on the planet when it comes to retail.
The company, which reportedly employs about 800 people, however, is vertically integrated. It grows, processes and retails in the jurisdictions in which it operates.
Fast evolving
This is just another in a string of capital markets transactions that has really spun the Canadian into a place few would have expected just a few short years ago. Which speaks to the unpredictability of the market in general.
By now, many of you are well aware of the goings on in marijuana-land and it’s truly been enough to make one’s, er, head spin.
Thing is, there’s no end in site to the action. If anything, we’re still just getting started.
I attended a conference in Toronto earlier this week and with half the day dedicated to hearing from a collection of Canadian marijuana companies, some valuable insights were indeed passed along.
Perhaps the most informative part of the session was a panel discussion that included executives from three of the more prominent Canadian marijuana participants: CannTrust (TO:TRST), Hydropothecary (V:THCX) and OrganiGram (V:OGI).
All made reference to how fast the industry is changing, and none had any concrete idea as to where we might be headed.
However, when asked about their prognostications for the next 12 months or so, one thing that they more or less agreed on was that there’s going to be somewhat of a comeuppance for many in the industry.
Capital isn’t flowing to new entrants as it once did, and they were particularly concerned about companies where the main focus of the business is growing the product. Vertical integration and a multi-faceted approach, which includes an international strategy, appears paramount and part of the winning formula.
The other thing that was agreed on across the board was that this industry is for real.
Perhaps not a surprise given all three companies are counting on it, but there’s little doubt that we’re headed for something that’s going to be much bigger, and a more prominent part of all of our lives in the years ahead.
Is it a buy?
Which brings us back around to MedMen.
Does it have a winning formula?
The CEO certainly thinks so. He’s aiming to turn today’s $1.6 billion company into an entity worth many times more in the years ahead. Even throwing around a $25-billion-$50 billion figure in a recent article in the Globe.
Here’s the thing.
The financial history of this company is clouded at best. You see, they’ve entered the Canadian public market by way of what’s known as a reverse takeover. That is, they’ve essentially behaved like a hermit crab and moved into a pre-existing listing.
The benefits of this, for the company, is that they don’t have to jump through all of the regulatory hoops and run through the process involved in an initial public offering (IPO). Again, this is good for the company but not so much for prospective shareholders.
When it comes to an IPO, historical information is already scarce. A real pet-peeve of mine.
But this reverse takeover process almost eliminates historical financial information all together.
From the sparse info available, MedMen booked US$3.3 million in sales in the six months leading up to December 2017 and lost US$15 million. Yet, Mr. Market has ascribed a $1.6-billion valuation to this company.
This dynamic is not solely attributable to MedMen. Marijuana stock valuations are high. Like, really, really, really high.
Which was another reason the collected panel at this week’s conference foresaw some kind of a comeuppance. The pretenders don’t warrant the valuations that have been ascribed, a situation that will rectify itself.
Is MedMen a pretender? Time will tell.
Foolish Bottom Line
Given the acceptance that the Canadian capital markets have granted marijuana stocks, we’ve got a very exciting industry to watch evolve in the years ahead. This, however, will be a process. Considerable uncertainty exists, and those valuations – man-oh-man.
But there will be winners. Big winners. And the returns that have been booked by these winners to this point are bound to look rather insignificant over the course of the next five to 10 years. Patience, selection and balancing the risks that exist are critical to achieving the monstrous returns that are going to occur.
Tread carefully.
Iain Butler,
CFA
Chief Investment Advisor
Motley Fool Canada