With Justin Trudeau’s marijuana legalization bill passing the Senate last week, Canada is one step closer to becoming the first major country to legalize adult use of marijuana on a national scale.
As it happens, I’ve just returned from the O’Cannabiz Conference and Expo, a jam-packed several days in Toronto covering anything and everything cannabis. Despite never having expected attending a cannabis conference to be part of my professional life, I came away from it more optimistic about the future of the cannabis industry and the potential opportunity for investors.
It will likely just be a matter of months before recreational cannabis is in full effect in Canada, and there are dozens of companies bracing for the floodgates to open.
The beginning is near
Since 2014, the Canadian medical marijuana market has given some of the early movers a chance to gain some semblance of a toehold in the category, but everyone is eying how the industry will evolve once recreational marijuana is in full effect.
At O’Cannabiz, I spoke to an Aurora Cannabis employee who has been with the company for three years, and she told me, “Three years ago was the pre-beginning. Today is the real beginning.”
I had the chance to interview several CEOs and executives, and it is fascinating (and telling) to hear how companies have different strategies to capture share of a burgeoning market as quickly as possible.
Some companies think obtaining a growing license from Health Canada is overrated, at least when it comes to a long-term competitive advantage. It is in Health Canada’s interest to grant more growing licenses to help drive down the price of marijuana to squeeze (and eliminate) the black market, so a growing license itself may not be the golden ticket that some believe it to be today.
And let’s not forget that cannabis is an agricultural product – something that typically isn’t all that attractive from an investing perspective. One executive compared the situation to many of the largest consumer goods brands today. Does anyone know of – or want to invest in – the coffee growers for Starbucks (NASDAQ:SBUX) or the tomato growers for Kraft Heinz?
Other companies see Canada as a stepping stone to what will ultimately be a much larger global opportunity in legal cannabis. Canada will be the place to cultivate brands, build a reputation and ultimately forge international partnerships.
Regardless of which strategies (and companies) come out on top, Canada will be the laboratory the rest of the world looks to when it comes to cannabis. And with a legitimate recreational market on the horizon, I think the time has finally come where Foolish, business-focused investors with a long-term time horizon should pay close attention to the cannabis space.
The Foolish Bottom Line
The cannabis space has been dominated by speculation and hype up to this point, largely because most of the “pure play” cannabis companies are dealing in hypotheticals and projections for this year and beyond.
Once recreational cannabis is legalized, however, we’ll finally get a chance to see these strategies in action. Right now, cannabis companies are all talking the talk, and soon enough we’ll know who is walking the walk.
In the meantime, however, remember that cannabis stocks will continue to be extremely volatile. The space is still primarily made up of unprofitable businesses with next to no historical financial performance, meaning speculation and short-term volatility will rule the day for the foreseeable future.
This is why it is critical to ensure your portfolio is set on a strong foundation before you let your eyes wander toward riskier bets like cannabis. Don’t drift into riskier corners of the market before you have invested in reliable businesses with solid growth prospects over the long haul – companies that should be the cornerstone of your investing portfolio.
David Kretzmann
Motley Fool Canada Hidden Gems Canada
Disclosure: David Gardner owns shares of Starbucks. David Kretzmann owns shares of Starbucks. Tom Gardner owns shares of Starbucks. The Motley Fool owns shares of and recommends Starbucks.