The legal cannabis industry accomplished something in 2018 that it had been trying to do for decades. Namely, it gained validity after Canada became the first industrialized country in the world to legalize recreational marijuana. It's become clear that the legal weed industry is thriving and here to stay, which is why pot stocks have performed so well in recent years.
But the marijuana industry does have its limitations, especially if we're talking about the United States. Despite roughly two-thirds of the country approving medical cannabis in some capacity since 1996, and 10 of these states also legalizing adult-use pot, marijuana remains entirely illicit at the federal level. More specifically, the federal government's Schedule I classification of pot means it's wholly illegal, highly prone to abuse, and has no recognized medical benefits.
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This classification has kept nearly all Canadian pot stocks firmly on the outside looking in. Many have suggested that they wouldn't consider entering the U.S. market until the federal government changes its tune on cannabis, even if sales in a legal U.S. pot market would dwarf the legal weed sales potential in Canada.
However, thanks to the signing of the Farm Bill into law in December by President Trump, some of these pot stocks no longer have to wait on the sidelines.
The largest pot stock moves into the United States... legally
Canopy Growth (CGC 1.28%), the largest marijuana stock by market cap, announced on Monday, Jan. 14, that it had been awarded a license by New York state to process and produce hemp.
Hemp may look like its sister product the cannabis plant, but there's a pretty big difference. Whereas the cannabis plant tends to be rich with tetrahydrocannabinol (THC), the cannabinoid that gets a user high, hemp plants are rich with cannabidiol (CBD), the nonpsychoactive cannabinoid best known for its perceived medical benefits.
Hemp has numerous industrial uses, such as in paper, shoes, clothing, rope, food, insulation, and animal feed. It can also be used for its rich CBD content to produce hemp-based CBD oil. As a result of the Farm Bill becoming law, hemp production, and hemp-based CBD, are both now legal. And since they're legal, Canopy Growth can enter the market and still adhere to its promise of not entering the U.S. until its actions and business activities comply with federal law.
Check out the latest Canopy Growth earnings call transcript.
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According to Canopy Growth's press release, it'll be investing between $100 million and $150 million into its New York operations, which will produce all forms of extracts, including hemp-based CBD oil. This investment is easy to come by for Canopy, which received a $4 billion equity investment from Corona and Modelo beer maker Constellation Brands, which closed in November. With a war chest totaling an estimated $4.3 billion, Canopy Growth has been looking for a reason to put its money to work in the high-growth U.S. cannabis industry. Although not strictly a cannabis product, its hemp-based investment could still deliver similar margins.
The company is expected to announce the location of its extracting facility in the southern tier of New York state within the next 100 days.
This isn't Canopy Growth's first rodeo with hemp
However, don't think Canopy Growth simply lucked into this licensing grant because of its size. It was awarded this hemp processing license because it's already an established figure within the hemp industry.
In Saskatchewan, the company harvested more than 190 million square feet of hemp (about 4,500 acres) during its first season. Once processing is complete, Canopy Growth expects to yield about 7,000 kilograms of hemp-derived CBD per year. The company can choose to sell this product in Canada, export it to approved overseas markets, store it for future use, or perhaps export it to the U.S. in the future, if laws on CBD imports were to change. As of right now, this 7,000 kilograms of hemp-derived CBD can't be shipped into the United States.
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In addition, Canopy Growth completed its acquisition of Colorado-based ebbu this past November. Ebbu has an intellectual property (IP) portfolio of more than 40 cannabis-related patent applications, including IP that's specific to the hemp-growing industry. In other words, ebbu can add value to both the yield and extraction department, making Canopy Growth an attractive hemp-processing partner.
And of course, Canopy Growth has a mountain of cash. The company hasn't been afraid to use its capital to develop infrastructure capable of producing at commercial scale. The company's cannabis channels and branding are unrivaled in Canada, which demonstrates what it can do for hemp-derived products in the United States.
Before you get too excited
While it's great news that Canopy Growth has added yet another viable long-term sales channel, the near-term problem remains that Canopy is perhaps the least likely of all major marijuana growers to turn a profit this year.
Canopy Growth is in the midst of completing its 5.6 million square feet of growing space, expanding its product line, marketing and building its brands, moving into international markets, and making acquisitions. These are all costly, time-consuming aspects in the near term, and no matter how much revenue the company brings in, there's a very good chance it'll lose a lot of money in the interim.
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In Canopy's most recent quarterly report, which, mind you, didn't include any post-recreational weed sales, the company delivered a nearly 215 million Canadian dollar loss on an operating basis. This may lessen a bit as recreational sales are factored in, but Canopy's costs are likely to be higher than any other pot stock given the breadth of its infrastructure.
Prior to the passage of the Cannabis Act in June, and the subsequent legalization of recreational sales on Oct. 17, 2018, promises were more than enough to push pot stocks like Canopy Growth higher. But with marijuana now legal to our north, operating results actually matter to Wall Street and investors. Canopy is unlikely to produce anything palatable from a fundamental perspective for at least a year, if not longer, making this far from a lock to be a good investment -- hemp or no hemp.
