One of the most common questions we get on Market Foolery -- by far -- is how to invest in the increasing legalization of marijuana.

In this episode, Chris Hill talks with analyst David Kretzmann, who just got back from a marijuana conference in Canada, about what the future holds for marijuana companies and the investors who buy their shares. Find out which market trends to keep an eye on as this story plays out, the safest way to stake your bets in this new frontier, how the U.S. legalization question looks right now, and more.

If you want more from The Motley Fool about investing in marijuana, check out fool.ca/marijuanamoment.

A full transcript follows the video.

This video was recorded on June 11, 2018.

Chris Hill: It's Tuesday, June 12th. Welcome to Market Foolery! I'm Chris Hill. Joining me in studio, it's David Kretzmann, back from the Great White North.

David Kretzmann: Absolutely!

Hill: Good to see you!

Kretzmann: Good to see you, good to be back!

Hill: We're taping this on Monday afternoon. If there's breaking news Tuesday morning and we're not talking about it, that's why. We're taping this on Monday afternoon.

Kretzmann: Hopefully the news fairy cooperates with us and gives us a dull day tomorrow.

Hill: Yes. If the news fairy wants to show up later in the week, that's fine. We're 100% fans of the news fairy. Just, maybe not Tuesday morning. Anyone who follows you on Twitter -- if you're on Twitter and you're not following David Kretzmann, you can, it's @David_Kretzmann -- probably knows where you spent the weekend. You were up in Canada, at a cannabis convention.

Kretzmann: Never thought that would be part of my professional life. Ever! But here we are.

Hill: [laughs] I was going to ask, "So, when you started working here at The Fool ... " And, just to set the context, every now and then we will talk about, certainly in Canada, but also here in the United States, the growing legalization of marijuana. It's one of the most popular questions we've gotten over the last two years on this podcast, as people see this trend growing -- what is the way to invest into it?

Canada is expected to legalize cannabis use across the country. The last thing I read was that it had passed something in the Senate, and now it's going back to the House of Commons. We'll leave it to the Canadian politicians to work through that. But, in terms of this convention, there are a few things I want to get to, but let's just start with your headline. What was your main takeaway from this event?

Kretzmann: There are a lot of smart, energetic people working in the cannabis space. They're not all laid back! [laughs] They're not feeling the full effects of the products that they're pushing.

But, this is a really exciting space. I think, for the past couple years, I, and I think a lot of other people, tended to write it off, because for a long time, there has been so much speculation and hype in the industry. In Canada, medical marijuana has been legal for a few years on a national level, so you have some of the companies, like Canopy Growth and Aurora, which are now trading for multibillion-dollar market caps, even though their trailing historical numbers really are almost non-existent. Canopy, right now, the largest cannabis company in the world, they generated about $21 million of revenue in the last quarter, and they have about an $8 billion market cap.

So, there really is so much hype and high expectations for what the future will bring. But I think we're now finally at the point, with legalized marijuana on the horizon in Canada, where we are going to see -- right now, basically, all the companies are walking the walk, but soon, we'll be able to see who's talking the talk.

Hill: Don't you mean the reverse?

Kretzmann: Yes, I do.

Hill: Everyone's talking the talk.

Kretzmann: That's right. That's why you're the host, Chris. So, soon, the way I see it, we will see who's going to be walking the walk. At this point, you have some companies who are set up with medical marijuana products. You can sell that in a limited way in Canada right now on a national scale. But soon, we'll get a sense for which strategies are actually capable of being implemented, which companies have a sustainable competitive advantage. At this point, so much of it is hypothetical and you're taking companies at their word for what they can do this year and beyond. A really exciting time in the space.

Hill: This was a three-day conference in Toronto, over a hundred speakers, breakout sessions, mainstage sessions, a trade show floor with more than 200 vendors on it. Obviously, there are a lot of opportunities. I have to say, though, I was looking at some information on the event itself, and the thing that leapt out to me that I wasn't prepared for was a session for pets. There was a session entitled "Ask The Vet: Pets And Cannabis." Like, is this really how wide the opportunity is for this industry?

Kretzmann: You know, pets deal with depression and aches, too. Why can't they benefit from cannabis, as well? Yeah, more than one company I talked to, they're planning to enter a lot of verticals, including pets. I don't know how big of a category that will be, but, I mean, people love to treat their pets well these days, and pamper their pets. So, potentially, cannabis could be a way to help treat pain or anxiety with pets, because apparently, pets deal with the same emotions and ailments that humans do.

Right now, it's almost like a shotgun approach with this whole industry. With recreational cannabis coming online in the coming months in Canada, it's almost like the floodgates are opening. You have an industry here that has been under prohibition for 90 years or so. You know people use the product. You know there are a lot of avid fans of the product. But it hasn't been accessible on a legal scale. So, at this point, all of the sudden, you're going to have a rush to grab as much market share as you can, as quickly as possible, and then just build out these brands and distribution. You have a lot of companies basically jockeying for a position, with slightly different strategies, or where they're going to focus initially. To me, that's what makes this an especially fascinating time.

Hill: We've talked before about CES, Consumer Electronics Show, which happens the first week of January every year. You've been to that a couple of times. We've talked in the past, when you've gotten back from that. We don't have to name specific industries, but just think of any tech industry, any sort of fad, for lack of a better word, in consumer technology, and you go to CES, and you go to the trade show floor -- which is bigger than the trade show floor that we're talking about for this event -- you go to the trade show floor at CES, and there's 25 companies that are all modeling their version of whatever this consumer tech is. And, as an investor, you look at that, and you think, "There's no way they all survive." Is this, on a smaller scale, a similar situation that you saw in Toronto, where you look at, there's a big market opportunity, there's going to be a land grab, but there's no way they can all survive?

Kretzmann: Yeah, I think that's the right way to think about it. Most of the people I talk to, they think there'll probably be four to six major companies that come out and establish themselves as brands within Canada, and then eventually on a global scale, as more and more countries embrace medical and recreational cannabis use on a legal level. So, yeah, in that sense. There will be consolidation. There will probably continue to be a lot of mergers and acquisitions, which we've already seen up to this point, Aurora being the main one as far as M&A activity, making two huge acquisitions so far this year. Then, you'll see a lot of these smaller companies, I think, eventually flub out.

It's interesting, too, because marijuana is an agricultural product. Just getting a license to cultivate and sell marijuana in Canada, that alone is not a golden ticket. You need to do more to establish and build a brand, find partnerships, find ways to get your product in front of consumers. And, at this point, it's still not completely sure what the rules will be as far as selling to consumers, whether you'll even be able to have a brand on the product. So, there are still some question marks there.

I think, as investors, the tricky part is, at this point, you don't have a whole lot in the way of historical numbers to go off of, so you're really judging the companies based on their leadership teams, the hypothetical scenarios and projections that the companies themselves are putting out. And then, you're trying to get a sense for how big this market will be and how quickly.

For me, as an analyst, it's fascinating. I think you're almost approaching it like a venture capitalist, but in the public markets, because a lot of these companies are public in Canada. But, I think you almost have to spread a lot of bets as an investor, go into it with that mindset where you'll probably have a couple really big winners, but then a lot of companies that die out. Ideally, when you're thinking about investing in this space, you find some of those winners.

Hill: In terms of the executives that you spoke with, because I know you had the chance to interview some, and even just have casual conversations with others, was there any sort of common refrain that you heard from executives in the cannabis industry regarding ... "fear" is probably too strong and definitely an inaccurate word, but, in terms of, "Here's the thing we're not sure about. We have a lot of enthusiasm about X, Y, and Z, but the thing that we're not sure about is X." Was there any sort of common refrain there? Or did it really just depend on the company itself?

Kretzmann: It depends on the company. Some companies are saying, "Hey, compared to Canopy Growth, we're way undervalued." Then the question is, is Canopy Growth overvalued? It might not be a case that many companies are undervalued. Maybe they're fairly valued, and Canopy is overvalued. Sorry, repeat your question again?

Hill: Just, any sort of common concern you might have heard.

Kretzmann: I think the common consensus with a lot of experts and insiders within the industry is that, especially for the companies with the higher valuations, like in the multibillion dollars, the Canadian market alone is not close to big enough to support those valuations any time soon. So, really, the name of the game for these bigger companies with these higher valuations to justify that higher valuation, they need to make inroads quickly into international markets. So, you're seeing Germany, Denmark, some countries in South America, Australia, you're seeing a lot of these companies try to strike up some sort of distribution partnership or brand partnership, licensing agreements, with entities or companies in these foreign markets.

Because, eventually, the European market will be far bigger than Canada. The reason Canada is front-and-center here is just because they're going to be the first to legalize it on a recreational scale. But, Canada will probably be a smaller market than California and Oregon and Colorado. So, it really is an interesting position for Canada to be in. I think that's why investors should be paying attention to the Canadian companies. Just by virtue of how a lot of countries around the world are approaching this and taking more of a prohibitive stance on marijuana, it gives these Canadian companies a chance to become the established global brands.

Hill: One more question on the executives that I have has to do, not with Canada, but with the United States. Is there anything that you heard regarding how they view the United States, whether it's as a market opportunity or, "What's happening in Canada right now on a legalization level is absolutely coming to the United States?" Did you hear any sort of predictions along those lines?

Kretzmann: Not particularly. There are a lot of scenarios being walked through. Apparently, Donald Trump, sometime last week, he said he was open to the idea of decriminalizing marijuana on a federal level, which would open the door for more states, for there to be more of a uniform law in the U.S. But, at this point, the U.S. is a scrambled market. You have a few states that have legalized it medically, you have some who have legalized it recreationally. But since there isn't that uniform federal law one way or another that at least enables companies and states to go forward with these laws without fear of federal persecution, you have a lot of fragmented markets in the U.S. Each state is a little bit different. For companies, it's hard to really build anything along the lines of a national brand that consumers know.

Another interesting thing is, within California and Oregon, you have thousands of licensed producers, people or companies who can grow marijuana. So far, Health Canada has only given out around 100 or so licenses to grow. So, at least initially, the number of licensed producers of marijuana in Canada will be much more consolidated compared to what we've seen in some states. Apparently, in Oregon in particular, the market has just been flooded with product, and it's been very tough for any company to gain any sort of meaningful traction as a brand.

But, I think, down the road, all eyes are on Canada, whether you're in Europe or South America or the U.S., just to see how this process goes with legalizing recreational cannabis. Assuming it goes smoothly -- and certainly, people in the industry, they think it will go smoothly -- then, you'll see more countries loosen up and be willing to, if nothing else, allow medical marijuana, but eventually recreational marijuana. If and when the U.S. gets to that point, it'll by far be the biggest market.

I think a lot of companies are looking, at this point, maybe finding some sort of licensing agreement into the U.S. Or vice versa, if you're a U.S. company looking to bring your brand into Canada. I think it'll be easier for companies to establish a brand in Canada. But, realistically, I think, most companies are probably thinking, maybe in three to five years, you'll see the U.S. market be more accessible on a national scale. But in the meantime, it's a tricky market, just with it being so local, and still so many question marks over what Attorney General Jeff Sessions will do, what the President may or may not embrace. So, still a lot of question marks with the U.S.

Hill: I mentioned at the top, in terms of industry questions, we've gotten more questions about this industry over the last two years than any other industry that I can think of. You told me right before we started taping, you've set up a special website just for this?

Kretzmann: Yeah! Essentially, the reason I was at this conference is, in Motley Fool Canada, we've long gotten questions about the cannabis space. I think, given the fact that recreational cannabis in Canada is very close -- as soon as a month, but probably within the next few months, it'll be legal. You'll start to see which companies legitimate, and which companies are worthwhile from an investing perspective. Basically, the speculation will start to diminish, and I think we'll be able to take our Foolish, business-focused approach to this space.

We're in the process of putting together a product looking at the cannabis space. At fool.ca/marijuanamoment, you can sign up for updates, which we'll be sending out in the next couple weeks. So, if this is a space that interests you, then sign up, and we'll have some exciting news coming up.

Hill: I'll include that URL in the description of this podcast. Last thing before I let you go. We've both been to different trade shows before. The times I've been at South by Southwest, I love to walk the floor and just see who's here, what industries are here, what countries, cities, etc., what are they looking to talk about, what are they looking to promote, that sort of thing. Of course, as anyone who's ever been to a trade show knows, part of getting people to engage you on the trade show floor is usually to offer some sort of little freebie. Sometimes it's candy, sometimes it's swag of some sort.

I have to ask. On the cannabis trade show floor, what's the weirdest thing you saw, or, something that made you do a double-take in terms of, "Wow, they're giving that away for free?" Anything? I hope they're not going to disappoint me. There had to have been one booth that said, "Here are some marijuana gummies," or something. I don't know.

Kretzmann: Are you wondering if I brought some free samples back to HQ, Chris?

Hill: I'm not asking that here in the studio into a live microphone, no. [laughs]

Kretzmann: Alright, maybe off the record, sure. So, part of the journey of learning about this space is learning about the different products. There are companies giving out rolling papers -- so, if you're rolling your own marijuana cigarettes, you use these papers. There's also grinders, or crushers. I mean, I'm a total noob when it comes to actually knowing how to use these products, but I surmise that you crush the bud or something, and then maybe you roll the crushed stuff in that cigarette. So, those were unique.

Companies were handing out T-shirts, sunglasses, all sorts of branded stuff. I don't know if they were actually able to give out THC-infused samples of stuff. There was a company that did have gummies and stuff like that, but I doubt they actually had marijuana in it, but maybe just a little precursor of what's coming down the pike in the next year or so.

Hill: Alright, more to come from fool.ca/marijuanamoment. David Kretzmann, thanks for being here!

Kretzmann: Thanks, Chris!

Hill: As always, people on the program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. That's going to do it for this edition of Market Foolery. The show is mixed by Austin Morgan. I'm Chris Hill. Thanks for listening! We'll see you tomorrow.

Chris Hill has no position in any of the stocks mentioned. David Kretzmann owns shares of, and The Motley Fool owns shares of and recommends, TWTR. The Motley Fool has a disclosure policy.