The marijuana industry is truly growing like a weed, and it has investors willing to chase the green rush counting their blessings. Over the trailing year, more marijuana stocks with a market cap of $200 million or more have at least doubled in value than haven't.
The impetus for this surge in pot stock prices is twofold. First, we have incredible sales growth behind the legal weed industry. Cannabis research firm ArcView estimates that the North American legal cannabis market could grow by 26% per year through 2021, putting its value at nearly $22 billion. That's not chump change, and it's given investors every reason to believe that this industry could be a hot investment for years to come.
The public's opinion on cannabis has also been a positive catalyst. National pollster Gallup found that just a quarter of Americans in 1995, the year before California became the first state to legalize medical cannabis, supported the idea of legalizing recreational marijuana. As of October 2017, this once-taboo topic was now favored for legalization by almost two-thirds of all survey respondents. This growing support for pot signals that increased pressure could be placed on elected officials to change its scheduling.
Yet in spite of these improvements, pot companies in the U.S. still face many restrictions from the federal government. As a Schedule I substance, marijuana has no recognized medical benefits and is entirely illegal. This means there's a lot of red tape associated with medical research, making it difficult to run much-needed benefits-versus-risk studies that skeptical lawmakers on Capitol Hill have requested. It also means that weed businesses have little to no access to basic banking services, and that they face major tax disadvantages since they're disallowed from taking normal income tax deductions.
This Canadian pot stock just struck a deal with a major pharmacy chain
For true marijuana success stories, investors have looked to our neighbor to the north, Canada. Having legalized medical marijuana back in 2001, and currently debating legislation that would legalize recreational weed by July 1, 2018, Canada offers a somewhat welcome environment to marijuana businesses.
Of course, finding ways to make inroads in a crowded Canadian medical cannabis industry isn't easy -- but Aphria (NASDAQOTH: APHQF) believes it's found a way.
Earlier this week, Aphria announced a blockbuster five-year partnership with Shoppers Drug Mart, which is part of the Loblow Companies. The deal allows Aphria to supply its roughly 1,300 Shoppers Drug Mart and Pharmaprix locations with dried cannabis for online purchase across the country. Despite being legal medically, dried cannabis isn't allowed to be sold inside physical pharmacy locations. Nevertheless, this deal opens up all sorts of opportunities for Aphria, which should be able to reach significantly more eyeballs and capitalize on the convenience of online delivery. As Aphria CEO Vic Neufeld said, "We have an impeccable record cultivating and producing high-quality, medical-grade cannabis. These traits make us a strong partner for an organization looking to serve and support Canadian patients."
Aphria stakes its claim in Canada's burgeoning cannabis market
This agreement pretty much couldn't have come at a more perfect time for Aphria, either. It's in the midst of organically expanding its growing capacity through a more than $100 million four-part expansion. Phase IV, as it's known, should be completed by January 2019, and the 1 million square feet of growing capacity could yield approximately 100,000 kilograms of dried cannabis annually. This new production would serve the recreational market (should it be legalized in Canada by July 2018), Aphria's export channels (it's one of a handful of growers authorized to export to medical cannabis-legal countries), and a growing base of medical pot patients.
Getting its foot in the door with pharmacies also sets a precedent in the industry that Aphria isn't going down quietly while Canopy Growth Corp. (CGC -6.57%) and Aurora Cannabis (ACB -8.05%) attempt to grow by making numerous acquisitions. Canopy Growth has been an avid acquirer, gobbling up Mettrum Health earlier this year, while Aurora Cannabis has taken its all-stock offer for CanniMed Therapeutics to CanniMed's shareholders. There will arguably be no medical pot company in Canada with better exposure now than Aphria, which should also sit well considering that Health Canada relaxed licensing rules for Canadian weed growers earlier this year.
It's also not hurt that Neufeld has placed more of an emphasis on near-term profitability than his peers. Companies like Aurora Cannabis and Canopy have been dragged down by acquisition-related costs, while Aphria has been profitable in almost every quarter for the trailing two-year period.
A lot depends on what happens with recreational pot legislation in the weeks and months to come, but Aphria appears to be one of the strongest marijuana stocks worth keeping an eye on.