The big day is nearly here. Just 18 days from now, on Oct. 17, recreational marijuana will be legal for purchase in licensed dispensaries, and online in some provinces, throughout Canada. This'll make our neighbor to the north the first industrialized country in the world to wave the green flag on adult-use weed, and also open the door to some serious profit potential for marijuana stocks.
How big could this opportunity be? Although estimates tend to vary wildly, primarily because there is no precedence to an economy the size of Canada legalizing marijuana, Wall Street believes it could generate $5 billion in added annual sales, not counting what's already being brought in via domestic medical cannabis sales. Needless to say, there's a lot of reason for excitement.
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Investing in pot stocks? Then you'll want to keep abreast on these trends
However, there will be far more for investors to closely monitor in the post-legalization environment than just which pot stocks have the highest production capacity potential. If you're invested in this space, or have considered dabbling in the risky cannabis industry, then here are five marijuana trends you absolutely must follow over the next year.
1. Brand building and product differentiation
For starters, you'll want to pay attention to the next phase of development for marijuana growers after capacity expansion -- namely, building up their brands and product differentiation. For some growers this might mean expanding their production to include cannabis alternatives, such as how Aphria (NASDAQOTH: APHQF) is constructing a state-of-the-art extraction facility to yield 25,000 kilogram-equivalents of cannabis concentrates each year.
For other growers it could mean, in the most literal sense, building up their brand to stand out in an ever-crowded field. KushCo Holdings, which is operating behind the scenes, is expected to play a key role in assisting growers with branding and packaging solutions that allow their products to stand out. Considering the strict packaging, marketing, and labeling regulations set forth by Health Canada, KushCo's expertise in this area will be invaluable to pot stocks.
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2. Industry consolidation
A second trend to monitor is industrywide consolidation. We've already begun to see quite a few buyouts take shape, with Aphria gobbling up Nuuvera for its international infrastructure earlier this year, and Aurora Cannabis (ACB 18.15%) seemingly buying everything in sight.
In May, Aurora Cannabis closed on its $852 million purchase of Saskatchewan-based CanniMed Therapeutics, then followed it up with a $2.5 billion buyout of Ontario-based MedReleaf. It's also in the process of gobbling up ICC Labs for about $221 million. These acquisitions, along with a partnership with Alfred Pedersen & Son in Denmark and a handful of organic construction projects, are what have pushed Aurora to the top of the pack in expected annual production.
The question is: What marijuana stock could be next? My dart-throw guess would be OrganiGram Holdings (OGI 2.63%). OrganiGram's unique position as the only large Atlantic grower, along with its single grow site in Moncton, New Brunswick, which reduces companywide grow costs, would likely make it an attractive takeover target. Not to mention, OrganiGram's 113,000 kilograms of peak production capacity isn't chump change, and would provide an immediate benefit to a larger grower.
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3. Brand-name partnerships and investments
Investors will also want to keep a close eye on partnerships and investments within the cannabis space.
It technically all started with Canopy Growth Corp. (CGC 15.03%) back in October 2017, when Corona and Modelo beer producer Constellation Brands (STZ 0.74%) made a $190 million investment in Canopy for a 9.9% stake. In August, Constellation upped its investment big-time, pledging to purchase 104.5 million shares of Canopy Growth at a 51% premium for $3.8 billion. Not only will this dynamic duo work on alternative cannabis products like infused beverages (once they're legal), but with Constellation's potential ownership stake able to surpass 50%, there's talk about the company possibly acquiring Canopy Growth a few years down the road.
Given that growth rates in the tobacco, beverage, and even Big Pharma industries have been subpar in recent years, there's the belief that brand-name companies will continue to look at marijuana stocks for growth opportunities. The aforementioned Aphria may be a logical target, given its high expected peak production of 255,000 kilograms and its focus on high-margin cannabis alternatives, such as oils and concentrates.
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4. International medical pot demand
Fourthly, it's important for marijuana stock investors to pay very close attention to international demand for medical marijuana.
You see, even though Canada is the one legalizing recreational pot, domestic demand is only expected to total about 1 million kilograms per year, according to Health Canada. Reports from select Canadian provinces and Wall Street have suggested that annual demand could be even lower, at around 800,000 kilograms. Yet, production may surpass 3 million kilograms by 2020, leaving more than 2 million kilograms without a domestic buyer. This is where the international market comes into play.
There are roughly 30 countries around the world, many of which are in Europe, that have legalized medical marijuana in some capacity. It's these European countries, most of which have nascent or nonexistent grow industries, that'll be reliant on Canadian exports to meet their demand needs.
What investors will want to eye is whether there's enough demand from these foreign markets to offset domestic oversupply. Though this probably won't be an issue initially, it could start to become a concern by the midpoint of next year. If foreign markets aren't able to absorb Canada's oversupply, then there could be some serious downside in the per-gram price of cannabis.
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5. Parliament's push to expand cannabis consumption options
Last, but not least, investors should closely follow the Canadian Parliament's expected discussion of new forms of marijuana consumption in 2019.
For those of you who may not be aware, dried cannabis and cannabis oils will be legal when the green flag waves on Oct. 17, but vapes, edibles, infused beverages, and concentrates will not be. Parliament is widely expected to discuss and approve new forms of consumption sometime next year, but this timeline is obviously subject to change.
The reason investors should pay close attention to Parliament's actions is that these alternative cannabis products offer substantially higher margins than traditional dried cannabis. The longer growers have to wait to bring these products to market, the higher the potential that their margins could erode. Plus, brand-name beverage and tobacco companies are liable to be interested in these alternative products, meaning dealmaking could be on hold until Parliament acts.
Long story short, it's an exciting time for marijuana stock investors, but there's a lot to pay attention to.
