The last month of action in Canadian cannabis stocks has many investors wondering:
“Have I missed the boat?”
Since Constellation Brands Inc. (NYSE: STZ) announced its blockbuster investment in Canopy Growth Corp. (NYSE: CGC) on Aug. 15 – and a bumper crop of additional good news – other major Canadian cannabis stocks have rocketed upward.
Cronos Group Inc. (NASDAQ: CRON)… 137%
Aurora Cannabis Inc. (OTC: ACBFF)… 129%
Canopy Growth… 110%
Tilray Inc. (NASDAQ: TLRY)… 613%
With gains like that, it’s natural to ask if the boat has sailed, at least for the foreseeable future. And in some cases, it’s true that some of these companies have a lot of work to do to justify their new valuations.
Fortunately, investors, even if they missed this rally, have incredible upside to look forward to in the cannabis sector.
The Biggest Wave in Cannabis Stock Gains Hasn’t Shown Up Yet (Not Even in Canada)
These gains of the past few weeks and months are just the beginning. That’s true not only for the big Canadian stocks that have taken off, but for other Canadian cannabis stocks – and even more so for their American counterparts.
Let’s put this into context: With the exception of Tilray, which only listed in July, 2018, Canadian cannabis stocks had actually been under pressure earlier this year.
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The recent rally more than erased the losses. But when you consider even the biggest companies on a year-to-date basis (rather than just since August), the gains fall into perspective.
Cronos Group… 82%
Aurora Cannabis… 24%
Canopy Growth… 127%
With the S&P 500 up just 7.6% for the year, those are still good gains. The market has barely begun to digest the profit catalyst due to trigger on Oct. 17 – Canada’s nationwide “adult use” recreational cannabis law.
Not only that, but investors have yet to realize the benefit of these companies’ European exposure. There’s very real potential for medical and, eventually, recreational cannabis there – and in Australia, South America, and Africa.
So the question isn’t, “Have I missed the boat?” but rather, “When does this boat really get going?”
Remember – most Canadian cannabis stocks didn’t appreciate nearly as much as the largest ones I just mentioned. Those gains, good as they are, are a just a blip on the radar.
What these other companies really are is a new investment opportunity.
There are now a few very large companies, boasting enormous cash reserves and high stock prices, turned loose in a new, highly competitive industry.
This environment is ripe for rapid consolidation; these “big fish” will be going shopping – and quickly.
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These companies will likely acquire several small- and mid-sized Canadian cannabis companies that would otherwise be fighting for sales niches in the Canadian market.
Companies with any sort of competitive advantage – specialty products, unusually good distribution deals, good foreign contracts, outstanding branding, etc. – are, without doubt, squarely in the sights of companies like Canopy and Cronos right now.
Aurora, for its part, already has pieces of several companies. I expect Aurora to roll them up sooner rather than later.
And again, this is just the Canadian pot stocks running ahead of total, nationwide legalization.
The profit potential south of the border, here at home, could easily dwarf anything we’ll see in Canada…
There’s Massive Upside to Unlock in American Weed Companies
American cannabis stocks, more so than Canadian companies, are just getting underway.
Many, particularly ones that trade on a Canadian exchange, have rallied since the Constellation/Canopy announcement.
But those gains have been nowhere near the magnitude of the big Canadian companies.
If that sounds underwhelming, it isn’t; the U.S. market will be eight to 10 times the size of Canada’s market – one Deloitte estimate could see more than $7 billion in sales “post-legalization” in 2019.
Nine states plus Washington, D.C., have legalized marijuana for recreational use, provided the user is an adult over 21. Medical cannabis is legal in 31 states, Guam, Puerto Rico, and the District of Columbia.
Even so, the real excitement for U.S. cannabis stocks is yet to come. Legalization efforts move through legislatures and referenda throughout the year. In fact, several pro-cannabis referenda are in front of voters this Election Day in November.
These things will move the needle. And as I mentioned earlier, some U.S. government agencies are already doing more to help the cannabis industry – albeit quietly.
So, stop worrying; cannabis stocks’ biggest gains are still ahead of us.
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