The marijuana industry has undergone a rapid transformation in a relatively short amount of time. Heading into 2018, this was an industry that, while gaining momentum, was still largely considered taboo. But with the legalization of recreational pot in Canada and the passage of the Farm Bill in the U.S., legalizing hemp and hemp-based cannabidiol, that's no longer the case.
Now that it's viewed as a legitimate business model that's showing the early signs of maturation, investors can expect rapid sales growth and, hopefully, profitability in due time. After all, with Arcview Market Research and BDS Analytics calling for $31.3 billion in global sales by 2022 in a recently released report, these dollars have to go somewhere.
Moving to reputable U.S. exchanges provides validity to the cannabis business model
But the most defining aspect of the marijuana industry's maturation might just be the steady move of marijuana stocks to major U.S. exchanges. We've witnessed more than a handful of pot stocks uplist or IPO on reputable U.S. exchanges, such as the Nasdaq and New York Stock Exchange (NYSE).
Why uplist? For starters, listing on the NYSE or Nasdaq places marijuana stocks side by side with time-tested and profitable business models. It casts aside the notion that cannabis is a taboo industry once and for all.
Secondly, it offers improved volume and, presumably, access to nondilutive forms of financing. Since trades are routed differently with the NYSE and Nasdaq compared to the over-the-counter exchange, it leads to less volatility on reputable U.S. exchanges, as well as generally higher daily trading volume. Not to mention, passing the rigorous checklist to be added to the Nasdaq or NYSE could go a long way to getting approved for a nondilutive line of credit or loan with a financial institution.
Speaking of financial firms, the third and final reason uplisting has been all the rage is that Wall Street firms may not be able to initiate coverage or purchase stock in over-the-counter-listed companies. However, most NYSE- or Nasdaq-listed companies are fair game for coverage and/or investment.
At this very moment, there are five publicly traded marijuana stocks that call the NYSE home.
Although Cronos Group became the very first marijuana stock to uplist in late February 2018, Canopy Growth (NYSE:CGC) appeared to be on its way to beating Cronos to the punch by months. The only thing that stopped Canopy from becoming the first pot stock to have uplisted was an equity investment of $190 million from Constellation Brands, the company behind the Modelo and Corona beer brands, in October 2017. Constellation would make an even bolder statement last year, with a $4 billion equity investment in Canopy, which is good for a 37% stake in the company.
Canopy eventually made the move in May 2018. It was clearly a good move, as today Canopy Growth is the largest marijuana stock by market cap and the only large-cap pot stock (a large-cap is traditionally defined as a market cap in excess of $10 billion).
Canopy Growth, which is aiming to have 5.6 million square feet of licensed grow space by sometime in 2019, will likely slot in as the second-largest producer by peak output at north of 500,000 kilograms per year. It also has well-defined sales channels and what's arguably the most recognized cannabis brand in the country (Tweed). Although losses are expected for many quarters to come as Canopy reinvests into various aspects of the business, being listed on the NYSE and gaining widespread exposure has certainly been a blessing for its shareholders.
Aurora Cannabis (NYSE:ACB) was the next pot stock to make the move, having uplisted to the NYSE this past October. Aurora is either the second- or third-largest marijuana stock by market cap, depending on its constant pirouette with Tilray that sees the two companies exchanging the No. 2 spot behind Canopy Growth.
What isn't in doubt is Aurora Cannabis' seat at the head of the table when it comes to peak production. An avid acquirer, Aurora Cannabis gobbled up CanniMed Therapeutics for $852 million, MedReleaf for $2.5 billion, and ICC Labs for $221 million last year. These buyouts, along with organic projects (e.g., Aurora Sky and Aurora Sun) and partnerships (Aurora Nordic), should push the company's peak annual output to perhaps 700,000 kilograms per year. Though production isn't everything, such volume should allow Aurora to negotiate long-term supply deals domestically and abroad.
Moving to the NYSE has certainly improved visibility for Aurora, too. According to Markets Insider, Aurora Cannabis is now the most popular stock to own on free online trading app Robinhood, which is popular with millennials.
Not long after Aurora made the move to the NYSE, Aphria (NYSE:APHA) followed suit. Its transfer from the over-the-counter exchange became official in early November.
Uplisting made a lot of sense for Aphria in its effort to attract institutional and long-term investors. Depending on how much capacity expansion Tilray undertakes, the 255,000 kilograms in peak annual output forecast by Aphria should slot it in as Canada's No. 3 grower. Best of all, construction and retrofitting of its two largest projects -- Aphria One and Aphria Diamond -- should be complete. These facilities will account for 220,000 kilograms of the company's 255,000-kilo forecast.
Of course, Aphria hasn't had such an easy go of things since making the move to the NYSE. In early December, short-side firm Quintessential Capital Management and forensic analysis company Hindenburg Research released a report alleging that Aphria purchased assets in Latin America from SOL Global Investments at an overinflated price and that these assets had, in fact, been acquired from shell companies for a considerably lower cost by SOL Global. Worse yet, SOL Global's chairman is an advisor to Aphria, with the report essentially implying a conflict of interest. Though Aphria has denied the allegations and is conducting an internal investigation, its longtime CEO Vic Neufeld is stepping down, and investor trust with the company is on shaky ground.
The most recent pot stock to have made the move to the NYSE (or I should say NYSE American boards) is Quebec-based grower HEXO (NYSE:HEXO).
Sporting a little north of a $1 billion market cap, HEXO may wind up as a top-10 cannabis grower when all is said and done. The company has about 1.3 million square feet of growing space that management anticipates will yield 108,000 kilograms per year at peak yield. The good news for HEXO and its shareholders is that perhaps up to 40% of its output is spoken for over the next five years. In April 2018, HEXO worked out a five-year supply agreement with its home province of Quebec for 200,000 kilos in aggregate, with the amount being supplied increasing with each passing year.
HEXO also made waves at the beginning of August when it and Molson Coors Brewing formed a joint venture to research and develop a line of cannabis-infused nonalcoholic beverages. With so many other growers generating buzz in Canada, HEXO was certainly an off-the-radar choice for Molson Coors. Although most alternative cannabis products, such as infused beverages, aren't yet legal in Canada, the expectation is that they will be by no later than this coming October.
Innovative Industrial Properties
Last but not least, marijuana-based real estate investment trust (REIT) Innovative Industrial Properties (NYSE:IIPR) actually went the initial public offering route on the NYSE all the way back on Dec. 1, 2016. That makes it the most tenured of all pure-play pot stocks on the NYSE.
Following this past Friday's announcement (Feb. 8, 2019) that the company was acquiring 43,000 square feet of industrial space in Sacramento, California, Innovative Industrial Properties now has a dozen owned real estate assets spanning 10 states. These "assets" are predominantly cannabis grow farms, although it does have processing facilities in its portfolio as well. Likewise, most of its purchases are for turnkey-type facilities, but the company has earmarked close to $23 million for its tenants for improvements or construction on its own land.
Innovative Industrial Properties has been virtually unstoppable since its IPO, with the company's fundamentals doing most of the talking. It's been profitable for many quarters now thanks to the low-cost structure of REITs, has raised its quarterly dividend twice since its inception, and has an average yield on invested capital of 15.2%, meaning it should net a full return on its $156.3 million in invested capital in less than five years.
If you're looking for the most established pot stocks, these five companies aren't a bad place to start your research.
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