Cannabis hype building up - Bubble or Opportunity?

Over the past couple of months, we have seen a surging interest in marijuana stocks. This has come after Canada was discussing and then finally passed legislation, which will come to effect from October this year, to allow recreational use of marijuana making it the first G7 country to do so. The first country to legalize cannabis was Uruguay in 2013 while a number of US states also permit recreational use of this drug.

The hype over this sector has more recently reached higher levels as earlier this month, Constellation Brands Inc. (STZ), the brewer of Corona, announced it will spend US$3.8 billion to increase its stake in Canopy Growth Corp. (CGC), the largest deal in Canada’s embryonic marijuana industry. Molson Coors Brewing Co. (TAP) is also starting a joint venture with Hydropothecary Corp. (HEXO) to develop cannabis drinks in Canada.

The Global Cannabis Stock index, which includes 52 companies across the U.S., Canada and Australia that deal in medical and legal marijuana sector, has now a market cap of around $37 billion. The cannabis market cap has been growing a lot lately and has also been massively affected by the Canopy deal which from a valuation of almost $4 billion is now at $10 billion (that is an increase of $6 billion over two weeks!).

The world’s biggest alcohol company Diageo (DGE), maker of Guinness, Smirnoff, Baileys, Johnnie Walker amongst others, is also looking for a partner in this segment. This is mostly being done due to a decline in the sale of beers and spirits and thus beverage firms need to find areas of growth to produce cannabis infused drinks. The idea that a genuinely global player like Diageo is also interested in cannabis is a very stimulating and is putting more limelight on the sector.

Any opportunities on the horizon?

Identifying new sectors and niche markets is very crucial when investing but we do must always understand potential pitfalls along the way and not get too excited when we see huge return numbers.

Over a two-week period, the Global Cannabis Stock Index registered strong return of +23%, massively pushed by the CGC deal that on its own increased by 90% over the same period (looking at moving averages on chart number 2 it seems that the upside is not over yet).

Looking at the index yearly chart however (see chart number 1), we can notice that after heating up late last year due to the buildup in the Canada legalization discussions, majority of the gains made were crushed in a matter of few weeks. Does this pattern remind you of something?

I am sure you are familiar with the Crypto currencies volatility and massive price hike over the course of last year that eventually declined all along. Although you might think that these investments are behaving in a similar manner, and you might be partially right when looking just at this chart, there are some fundamental differences which need to be pointed out.

a) Marijuana is something feasible, people can understand it and there is actually huge demand for it. It is basically like Food, alcohol or tobacco and also has medical use too so it is something which some consumers need.

b) Legalizing cannabis is basically legalizing a big ‘black’ market and hence there is proof that the market already exists – it just needs to pass through the new channel.

c) Once recreational marijuana becomes legal in Canada, other countries will slowly follow and hence we will see demand increasing for cannabis growers and sellers as the public can access it easier. People are less afraid to try it and consume it once it is legal (think about other drugs vs alcohol for instance, both are harmful but the legality of alcohol makes it much more demanded).

d) Medical marijuana is already accepted and being produced in various countries in the world so demand is already growing in that area.

e) It will not just be the smoking of the drug, but can also be infused with foods and drink thereby we should see more food and drink companies heading this way.

f) This is a new thing – much like internet was in the 2000s. Canopy Growth CEO actually was reported saying that the firm has potential to become ‘google of cannabis’ over time. Imagine having invested in Google or Amazon 10 years ago?

Apart from CGC which is now the largest company in this space and has seen a lot of attention following the deal, it is imperative to look at others as well and below you can find a list of the largest stocks in the marijuana global index. We mentioned Diageo before that is looking for cannabis partners so with CGC out of the question following their ties with Constellation, there have been reports that potential names for Diageo might be Cronos, Tilray or Aphria which have all seen their share prices increasing drastically.

Of course the market is in its early stages and investors will surely face huge volatility and lower volumes as compared to a traditional blue-chip equity investment. Like mentioned, there seems to be the ‘bubble’ pattern like we had for Bitcoin for instance and also due to the heavy hype being built around it with promotions on how to make a quick buck in a short period of time. Unlike cryptos and blockchain investments however, whereby these are still facing hurdles from governments, regulators and big financial institutions alike, marijuana investing is not just much simpler for people to understand but there is already a global acceptance for medical marijuana now in major countries and slowly, with Canada leading the pack, recreational use discussions will start in other countries too.

 

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Past performance is not a guide to future results. This information is being provided solely for information purposes and should not be deemed or construed as investment advice, advice concerning particular investments, advice concerning investment decisions, tax or legal advice. Similarly, any views or opinions expressed are not intended and should not be construed as investment, tax and/or legal recommendations or advice.  No person should act upon any opinion and/or information in this document without first obtaining professional advice.

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