Big changes are afoot in the cannabis industry. In just a matter of days, Canada's Senate is set to vote on bill C-45, which you probably know better as the Cannabis Act. If approved, and moved through the legal process in our neighbor to the north, Canada could become the first developed country in the world to have legalized recreational marijuana.
Legal weed is big business in Canada. The green light for legal marijuana is expected to add $5 billion or more in annual sales, which comes atop what growers are already generating from medical pot sales and via exports to legal countries. This expected growth is what's been behind the rapid appreciation in pot stocks since 2016.
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However, U.S. marijuana stocks haven't shared nearly the same fortune or outlook. In the U.S., marijuana is still a Schedule I substance, meaning it's entirely illegal, considered to be prone to abuse, and has no recognized medical benefits. Because cannabis is illegal, U.S-based pot stocks can't even list on traditional stock exchanges, such as the NYSE or Nasdaq. This has forced what few U.S.-based marijuana stocks that are publicly traded to list their shares on the somewhat illiquid and less reputable over-the-counter exchanges.
U.S. cannabis companies look north for listing
But a new trend may be under way: U.S.-based pot stocks looking north to list their shares. While U.S. marijuana stocks are also barred from listing on the Toronto Stock Exchange and Venture Exchange, they aren't barred from listing on the Canadian Securities Exchange, or CSE. Going public, or moving a listing to the CSE, makes a lot of sense for U.S.-based marijuana stocks because it offers a quick means to raise capital. This isn't to say that raising money via venture capital hasn't been successful for U.S. cannabis companies, so much as it's far less efficient than listing stock via an initial public offering or reverse merger.
Last week, the largest U.S.-based pot stock listing in Canada's history occurred on the CSE, with U.S. retailer MedMen Enterprises (CSE: MMEN), the company behind upscale cannabis retailer MedMen, going public via a reverse merger with Cormark Securities. Following an initial round of funding that totaled about $110 million and valued the company at more than $1.6 billion, MedMen's share price has shed about 18% of its value through midday Thursday, May 31. Still, at more than $1.3 billion, MedMen Enterprises suddenly ranks as one of the largest cannabis stocks investors can buy in Canada.
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MedMen, which had just one upscale retail dispensary open in California in 2016, now has a dozen stores spread throughout three states (California, Nevada, and New York), along with four cultivation facilities that are either already built or under construction. Its newest funding, derived from its listing on the CSE, should further allow the company to expand within the U.S., as well as enter the Canadian recreational market, once recreational weed is legal.
In March, MedMen announced a partnership with Canadian investment company Cronos Group (CRON -0.41%), which ironically is the first Canadian pot stock to have uplisted from the over-the-counter exchanges to a reputable U.S. exchange (in this instance the Nasdaq). The deal with Cronos Group will allow MedMen to bring its branded stores to Alberta and British Columbia. Though private retailers aren't allowed in all of Canada's provinces, these two provinces could be quite lucrative for the upscale MedMen, and its infrastructure partner Cronos Group.
A dangerous game
On the surface, MedMen does look to have an intriguing business model. By normalizing the process of purchasing cannabis, and focusing on higher quality strains, MedMen presumably would be angling its businesses toward a more affluent clientele. Higher income folks are less likely to be perturbed by fluctuations in the U.S. economy, making for a steadier consumer base than you'd find at your average cannabis dispensary.
But it's not without its fair share of risks.
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For starters, MedMen isn't exactly lighting things up with its operating results, even if its operating model sounds intriguing. For the six months ended Dec. 31, 2017, it generated a mere $8.4 million in sales. Meanwhile, the company racked up a loss of $43 million over that same period, mainly as a result of the company's aggressive expansion plans. It's certainly not uncommon for an early stage company in a rapidly growing industry to lose copious amounts of money as it's expanding, but it's important that investors understand that MedMen may need additional cash infusions in the months and years to come if it keeps losing money at such a rapid pace.
The other issue with a U.S.-based pot stock is that there's always the risk the U.S. federal government cracks down on state-level cannabis. If there is good news in this respect, it's that the American public strongly favors the idea of legalizing medical marijuana, and generally supports OK'ing the use of recreational weed. Even President Trump has come out in support of states' rights. However, cannabis opponents like Attorney General Jeff Sessions stand in the way of any efforts to alter how marijuana is treated at the federal level.
Even though this was a game-changing moment for U.S. pot stocks, it's not a reason for investors to be excited about MedMen Enterprises -- at least not at its current valuation.
