The marijuana industry is budding like a weed, and investors are really beginning to take note. Numerous marijuana stocks have doubled or tripled in value over the trailing year, much on the hope of continued legalization efforts, double-digit growth in legal sales, and improved favorability toward pot.
According to cannabis research firm ArcView, the estimated compound annual growth rate in the North American legal weed market through 2021 is 26%, which would place a nearly $22 billion valuation on the industry in just a few years' time. Considering that Mexico legalized medical cannabis in June, and Canada is considering the legalization of recreational weed by July 1, 2018, there's plenty of reason to believe new channels could come into play, and sales could soar.
There's also excitement in the U.S. regarding the public's favorability toward pot. The newest Gallup survey shows that almost two-thirds of respondents favor legalizing marijuana, which is up from just 25% back in 1995.
But for all of the good things that have happened for the marijuana industry, pot stocks are still mostly stymied in the U.S. by restrictive federal laws. As a Schedule I drug, cannabis has no recognized medical benefits and is entirely illegal in the United States.
M&A activity is in the air in Canada
That's not been the case for Canadian marijuana stocks. With medical cannabis legal since 2001, and the country priming to legalize adult-use weed by next year, it's looking to be all systems go. In fact, merger and acquisition (M&A) activity has been heating up in 2017 in lieu of this expected legalization next year.
January began with Canopy Growth Corp. (NYSE:CGC) acquiring Mettrum Health, which increased its medical marijuana reach to roughly half of all eligible Canadian patients, as well as its growing capacity. Canopy Growth has also been an active purchaser of land and greenhouse assets. As of its latest quarterly report, Canada's largest company by dried cannabis market share had 2.4 million square feet of growing capacity under development, with the option to add another 1.7 million square feet in British Columbia.
Aurora Cannabis (NYSE:ACB) has gotten in on the action, too. Despite growing organically via its Aurora Sky project, an 800,000-square-foot, highly automated, facility that's expected to yield around 100,000 kilograms of dried cannabis annually once completed in mid-2018, Aurora Cannabis is also looking to buy new capacity.
The company recently made an unsolicited bid to acquire CanniMed Therapeutics (NASDAQOTH:CMMDF) for what would amount to an all-stock offer worth about $425 million. Though CanniMed's board has adopted a poison pill measure to thwart off an acquisition, Aurora has made a pretty good case to shareholders with a substantial premium compared to the company's share price prior to the unsolicited bid. It also would allow the combined entity to save on costs while producing in the neighborhood of 130,000 kilograms of dried cannabis a year. With just a handful of major Canadian players emerging, mid-tier growers like CanniMed could find themselves ripe for a takeover bid.
Is this marijuana stock the next takeover target?
Should CanniMed eventually decide to be acquired by the cash-rich Aurora, my personal belief is that the next company that could fall squarely on the radars of Canada's major players is Organigram Holdings (NASDAQ:OGI).
Why Organigram? To begin with, the company is branching out beyond just dried cannabis. Though investors often think of marijuana sales in terms of dried cannabis, there are higher margins to be had with extracts and cannabis oils. As noted in Organigram's third-quarter operating results, released in late July, it sold nearly 190,000 milliliters of cannabis oils, compared to none in the year-ago period. Even though dried cannabis sales fell year over year, the higher-margin revenue from oils helped push net sales higher by 6%, year over year.
Second, Organigram is locked and loaded to become a recreational weed supplier to the New Brunswick market, assuming legislation in parliament allows for such a move. In September, the company entered into a memorandum of understanding with the New Brunswick provincial authority to supply a minimum of 5 million grams of dried cannabis a year, which is estimated to have a $31 million to $47 million value annually.
And perhaps most importantly, Organigram is dreaming big. Considering the expected surge in demand from the recreational market in Canada, it announced in October its intent to hire up to 140 new employees and triple the capacity of its existing grow facility from 36,000 to 134,000 square feet. This would boost capacity from 5,200 kilograms annually to around 25,000 kilograms per year.
Because Organigram is going up against some industry Goliaths, and its pockets aren't nearly as deep as those of Canopy Growth or Aurora Cannabis, both of which have in excess of $268 million in cash and cash equivalents on their balance sheets, being acquired and combining forces with a larger, cash-rich player might make sense.
Of course, investors should keep in mind that acquisition hype is a very poor reason to buy into a stock. Organigram does have its expansion fully funded, and it's focused on higher-margin oils, which are positives. However, profits remain elusive, and its pricing power could be challenged as bigger players flood the market with dried cannabis. As a stand-alone investment, I do see better opportunities in Canada. However, if it is acquired, there could be a reasonable premium in it for shareholders.
It's a marijuana stock worth adding to your watchlist.