This has been a year of big changes for the marijuana industry. Namely, our neighbor to the north passed bill C-45 on June 19, which also is known as the Cannabis Act. It will allow Canada to become the first industrialized nation in the world and second, overall, to legalize recreational marijuana for adults.
As you may have guessed, the possibility of adding $5 billion in annual sales has caused quite a stir with growers and investors. Canadian growers have been expanding their capacities as quickly as their balance sheets will allow, while investors have pushed marijuana stock valuations into the stratosphere on the expectation of strong top- and bottom-line growth.
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California's cannabis market could eclipse all of Canada
No one can argue against the idea that Canada's legalization is groundbreaking or could create a lifetime of wealth for select investors. But what's often overlooked is that another legal market could offer even higher annual sales than Canada: the state of California.
Back in November 2016, residents of the Golden State voted overwhelmingly (57% in favor to 43% against) to approve Prop 64, legalizing recreational marijuana. The sale of adult-use weed commenced in approved dispensaries on Jan. 1, 2018 and is expected to top $5 billion in 2019 once new dispensaries are licensed and begin selling cannabis.
Ultimately, California is the fifth-largest economy in the world by gross domestic product (GDP), eclipsing all of Canada. Even with the U.S. federal government standing firm on marijuana being an illicit substance (Schedule I drug), the California market has a genuine opportunity to be larger, and potentially more profitable, than Canada.
Yet truth be told, most marijuana stocks with a key focus on California largely go unnoticed. Much of the reason for that likely has to do with the disadvantages pot-based businesses face when operating in the U.S. as a result of its federal scheduling. But if this federal scheduling were to be altered, or if the California weed industry continues to grow at a rapid pace, this scheduling may not have a long-term impact on marijuana stocks with strong ties to California.
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These pot stocks have a keen focus on California
With this in mind, here are three marijuana stocks that clearly have California's cannabis market in focus.
CannaRoyalty
Few, if any, pot stocks have more skin in the game in California than Canadian-based CannaRoyalty (ORHOF). Though it has its foot in the door in six U.S. states and Canada, this royalty company primarily focuses on California.
Similar to the better-known Auxly Cannabis Group, CannaRoyalty provides equity or debt financing for growers looking to expand their capacity and/or product lines. In return, it receives a royalty on net sales of a product or group of products. It also has about 10 wholly-owned subsidiaries. Combined, this diversity of CannaRoyalty's portfolio offers it the ability to operate without the fear that struggles at one or two of its businesses will sink the ship, so to speak.
CannaRoyalty also aims to become one of California's leading distributors. There could be thousands of brands competing for shelf space and hundreds of licensed dispensaries when all is said and done. Yet there are only a select few distributors that act as middlemen. CannaRoyalty, through investments and acquisitions, is angling to find its niche in what could be a very profitable distribution space.
Keep in mind, of course, that this is a work in progress. Despite more than doubling sales in the first quarter from the prior-year period, CannaRoyalty's per-share net loss doubled to 0.10 Canadian dollars from the year-ago quarter.
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MedMen Enterprises
Another marijuana stock putting California first is MedMen Enteprises (MMNFF). MedMen, which was the largest U.S.-based cannabis initial public offering in history in Canada, operates high-end weed dispensaries in three states. It currently has four locations in New York, another four in Nevada, and eight locations in Southern California, including four in Los Angeles.
The money raised from its recent IPO should allow the company to rapidly expand its storefront presence within its key markets, as well as introduce its brand to Canada via a partnership with Cronos Group. MedMen has a focus on normalizing cannabis for personal use and higher-end products and branding, and there's a real possibility that MedMen could escape or lessen the hiccups that occur during economic contractions and recessions.
But before you go gung-ho into MedMen and its rapidly growing dispensary business, understand that its expansion is leading to a lot of cash outflow. The company's prospectus shows that its business generated only $8.4 million in revenue for the six-month period ending Dec. 31, 2017. Meanwhile, it lost about $43 million over this same time frame. Ouch!
It could be years before MedMen has an opportunity to generate recurring profits, and I'm not entirely certain investors will be that patient given the company's already lofty $1.6 billion valuation.
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Sunniva
Though anything but a household name in the marijuana industry, North American grower Sunniva (SNNVF) has devoted just as much attention to its Cathedral City, California assets as it has to its facility in British Columbia.
To date, Sunniva's biggest deal is its two-year supply agreement with Canopy Growth Corporation (CGC 0.28%), which is also based in British Columbia. This agreement with Sunniva Medical allows Canopy Growth to purchase up to 90,000 kilograms of Sunniva's wholesale production (in total) over two years. That's about 45% of its annual peak capacity.
But what might be an even more intriguing opportunity is the company's Sunniva California Campus, which spans 489,000 square feet. Currently under construction, this greenhouse facility also has a dispensary on-site. More important, it also operates an extraction facility in Cathedral City, which opened last month.
Alternatives to dried cannabis aren't as susceptible to the threat of commoditization over time and should therefore lead to considerably beefier margins for select growers. Sunniva's decision to focus on extracts could prove to be a smart one.
It also should be noted that big changes are expected for Sunniva's stock. On Tuesday, July 10, the company announced its intent to spin off its Canadian assets into a separate publicly-traded listing before year's end. This suggests that even more attention will be paid to California's burgeoning cannabis industry.
While it's tough to tell if these California-focused pot stocks will ultimately succeed in growing their businesses and bottom lines, there are no shortage of California marijuana stocks for investors to keep their eyes on.
