As I write this I’m preparing to head to Toronto for a series of cannabis conferences. These conferences are a perfect opportunity to learn firsthand from insiders in the burgeoning cannabis industry, which is especially buzzing with excitement in anticipation of Canada’s fast-approaching Oct. 17 date to legalize recreational cannabis use on a national level.
As I prepare to continue exploring and learning about the cannabis space, I wanted to share highlights with two conversations I’ve had with experts in the industry over the course of the summer.
What do cannabis licenses mean for investors?
First, I talked with Deepak Anand, a vice-president at Cannabis Compliance Inc., who works in business development and government relations. Anand highlighted to me what he thinks investors should be watching as cannabis businesses apply for (and receive) licenses from Health Canada:
“So, the one thing you want to be very cognizant of, and I think the markets have picked up on this quite well now, is don’t worry about a company just getting a cultivation licence. I mean, cultivation licences were a very big deal in the past, where now I think investors have realized that it’s the sale licence that actually means quite a bit more than the cultivation licence. Because you can’t generate revenue with a cultivation licence. You’re not allowed to sell. It’s the sale licence that actually allows you to generate revenue.
And while we may have 107 licenced producers, there’s only about 35 of them that can actually sell product. So that really limits your pool and I think that’s one of the things that investors should look at. What is the management team? Have they been able to execute in the past? Are they able to deliver? How quickly can they get their cultivation and sale licences?
And moving forward ... I think companies that are innovative and looking at different verticals in the market are going to be the ones that are successful. Because it’s not just companies that are able to grow cannabis. We’re beyond growing cannabis. Aurora (TO:ACB) and Canopy (TO:WEED) alone grow a lot of cannabis. They’ve committed to huge facilities. This market is really shifting from just cultivation of cannabis to different forums. Whether it be topics, whether it be extracts, whether it be formulations. That’s where the market’s going.
In Canada, so far, we’ve had two types of product: dry product and cannabis oil. And it hasn’t really been that hard to cultivate or grow product for that market, but where this is going is we’re going to open this up to a variety of different dosage forms. Even though edibles won’t be permitted on day one, it’ll probably be a year post legalization, it’s still a very competitive market.”
Misconceptions and ripple effects
I also had a chance to speak with Tom Adams, the managing director of investment research at BDS Analytics, a firm that has done extensive analysis and coverage on the cannabis industry. I asked Adams what he sees as the biggest misconception about the cannabis space today:
“The consumer research in particular – combined with the point-of-sale tracking – shows that the stereotypical stoner image of the cannabis user is just ridiculous at this point, if it was ever true. But we’ve come a long way since Cheech and Chong made Up In Smoke in the '70s, and it was all about young, long-haired males and their partying habits.
The fastest growing category in the point of sale – and that’s born out by the consumer research clearly – it’s just a cross section of Americans. About 25 percent of Americans in each state, and Canadians, say they’ve consumed cannabis in the past six months, and I think that’s probably more than people would think. And according to other surveys, between 10 and 15 percent consume monthly, and a significant percent consume every day.
And it’s a cross section of people. It’s a little bit weighted towards males, it’s a little younger than the average consumer, but just a little bit. It’s basically with the generation that grew up with cannabis in the '60s and '70s now being 70. It’s all age groups, both sexes, a quarter of everybody is a cannabis consumer. So, I think that’s startling to most people who haven’t thought about it much.”
And this is what Adams had to say with regard to the ripple effects he thinks Canada’s legalization on Oct. 17 will have on the cannabis industry:
Politically, I think the ripple effect we can expect is the United States to do the same. The States Act was introduced June 7th. A very bipartisan group of congressional leaders introduced the States Act to basically respect the 10th amendment and say, “This is a state’s issue. The federal government will now exempt those operating in legal states from enforcement of the Controlled Substances Act.” And that looks like if it doesn’t pass this year, it probably will next year. And President Donald Trump, a day later, said he would support it, so if Congress can get it done, we have a signature commitment from the president. That’s the big ripple effect from Canada going adult legal.
And beyond that, politically it’ll spread across the world. It’s going to go very slowly overseas, who very much bought into the U.S.-led campaign to demonize cannabis starting in the '30s, and have all had very strict rules on the books for the most part. So they, like U.S. states, we think, will start with medical. Germany launched medical sales in pharmacies, in actual pharmacies, and subsidized by the insurance companies and the whole package in April of last year. But most countries have very minimal access to medical, some, but very tightly controlled to the few pharmaceutical versions that are out there. Germany is actually selling flower in pharmacies.
The thing about Canada … Uruguay beat Canada to it with adult use legalization, but that’s a tiny country, and Canada is G7. So, now we’re talking about really giving legitimacy to the idea that this should be treated no differently than alcohol.”
The Foolish Bottom Line
Navigating what is essentially a brand-new legal industry can be a daunting task, but this is why I’m grateful to be able to meet and speak with industry experts like Deepak Anand and Tom Adams. There is little doubt that Canada is on the cutting edge of this burgeoning category, and all eyes are on Canada to see what happens come Oct. 17.
In the meantime, remember that cannabis stocks should be a relatively small portion of your overall investment portfolio. Most cannabis companies have a limited track record, are unprofitable, and trading at lofty valuations due to high expectations, meaning we can expect a lot of volatility with cannabis stocks in the coming months and, likely, years.
David Kretzmann