While cryptocurrencies like bitcoin and Ethereum have been all the rage of investors this year, marijuana stocks have quietly put together another impressive performance in 2017. Far more pot stocks over a $200 million market cap than not have seen their valuations double or triple over the trailing year.
The catalysts behind this bullishness continues to be a combination of strong legal weed sales, and a persistent shift in favorability toward cannabis. Marijuana Business Daily's annual report entitled "Marijuana Business Factbook 2017" anticipates 45% sales growth in 2018 in the U.S., and a 300% aggregate push higher in sales between 2016 and 2021 to a $17 billion market. Meanwhile, Gallup's latest survey showed that a record number of Americans (64% to be exact) want to see weed legalized nationally. Presumably, as this figure pushes higher, the pressure to reschedule cannabis in Washington, D.C. will be stepped up.
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Though there's a lot to like about the budding marijuana industry, there's also a pretty fixed glass ceiling known as the U.S. federal government standing in its way. Even with 29 states having legalized medical cannabis, and eight giving the green light to recreational marijuana, the drug remains a Schedule I substance (meaning wholly illegal) at the federal level. This bifurcation between U.S. states and the federal government is what gives marijuana stocks their incredible volatility.
There's been no stopping this marijuana stock of late
That volatility has been particularly prevalent in Canadian-based medical cannabis grower and retailer, Canopy Growth Corp. (CGC 0.83%). Over the past five weeks (closing price on Sept. 29, 2017 through Nov. 3, 2017), Canopy Growth's shares have appreciated by 54%, equating to $806 million in market value. In fact, it became the very first marijuana grower to cross into mid-cap territory with a valuation in excess of $2 billion. It only trails cannabinoid-based drug developer GW Pharmaceuticals for the largest market cap among pure-play marijuana stocks.
What on earth has lit a fire under Canopy Growth Corp.'s shares in such short order? The answer lies with three major catalysts.
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1. Canopy Growth landed a major investor
The most recent boost for Canada's largest cannabis grower comes from the announcement that beer and spirits giant Constellation Brands (STZ -0.44%) would be making a $190 million investment in the company, equating to 9.9% of its outstanding shares. While the maker of Corona beer was clear that it didn't plan to begin selling marijuana products in countries that haven't legalized the drug (ahem, the United States), it did suggest that investing in cannabis seemed like a logical next step in its evolution.
The move was also notable because there have been rumblings among some analysts that legalizing cannabis could steal sales from alcohol companies. A 110-page report from Cowen & Co. found a distinct increase in the number of drinkers who are using marijuana, as well as a corresponding decline in the number of regular cannabis users who also happen to drink alcohol. Constellation's minority investment suggests that it's willing to think of marijuana as a complementary, rather than competitive, product.
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2. The Canadian government appears to be moving forward with its recreational legalization effort
Another catalyst that continues to loom large is the growing possibility that Canada could become the second country in the world, behind Uruguay to legalize recreational marijuana in July 2018.
In April, Prime Minister Justin Trudeau introduced legislation that would make adult-use pot legal in Canada. While there have been concerns raised in parliament among conservatives, such as whether a home-grow option would give adolescents easier access to weed, and if the driving under the influence laws were harsh enough to regulate legal cannabis, the measure appears to be advancing.
That's noteworthy for Canopy Growth since it has the highest market share in Canada's medical marijuana market, and would be expected to also have the highest share of a recreational market. To boot, Canopy Growth is also one of a select few growers that's been given the OK to export dried cannabis to foreign countries that have legalized medical marijuana. For instance, Germany recently legalized medical pot, but it has virtually no domestic growing capacity. Importing from a company like Canopy Growth for the time being makes sense.
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3. Recreational weed in Canada will be price-competitive with the black market
A final catalyst, and one that builds on the last point, is the October announcement of favorable tax rates tied to the proposed legalization of adult-use marijuana in Canada. The proposal suggests a tax of $1 Canadian ($0.78 in U.S.) for cannabis priced at up to $10 Canadian ($7.80 in U.S.) a gram, and a flat tax of 10% on more expensive marijuana. This represents an even lower tax rate than what alcohol faces in Canada.
The reason this is notable is because Trudeau has driven home the point that the only way to drive black market pot operations out of existence is to be price-competitive. These relatively low tax rates should do just that, giving legal growers like Canopy Growth an opportunity to supply a major surge in legal-channel demand.
In order to meet this demand, Canopy Growth has been developing acreage around its headquarters for growing, as well as acquiring already developed companies, such as its Mettrum Health purchase, which was completed in early January.
At this point, it's unclear if Canopy Growth's bottom line can come anywhere near matching its nosebleed valuation. However, if the company continues to grow sales at more than 100% a year, investors might be willing to overlook full-year losses caused by reinvestment and stock-based compensation. It's a marijuana stock certainly worth adding to your radar.
