This Company Is Dominating the Marijuana Market
It’s no secret: I haven’t been a fan of marijuana investing in the U.S.
I know, I know… 29 states and the District of Columbia have laws legalizing some form of marijuana.
And seven states, as well as D.C., have passed laws legalizing recreational use.
But the industry is always threatened by the same villain, no matter the market - the U.S. government.
At the federal level, marijuana is still classified as a Schedule I drug. In the government’s eyes, that means it’s as dangerous as heroin.
Until that changes, investing in the U.S. marijuana industry is needlessly risky. You don’t need to look any further than the warning from the Toronto Stock Exchange earlier this month.
Marijuana companies with exposure to the U.S. got hammered last month when the TMX Group - the parent company of Canada’s main stock exchange - announced it believes that U.S. federal laws take precedence over state laws when it comes to marijuana.
That means any marijuana company doing business in the U.S. (and therefore in violation of federal law) could be delisted.
That’s why I’ve been focused on international marijuana markets.
These are much more exciting. And even better, there’s a lot more legal clarity.
For an investor, that’s a win-win.
At the moment, 29 countries permit some form of medical marijuana.
And in the European Union, 12 of the 28 members have medical marijuana programs.
Over the next few years, the global marijuana market will grow to $200 billion.
But let’s be honest… There are few cannabis markets more enticing at the moment than Canada.
Next year, Canada will legalize recreational use of marijuana.
And this market has the potential to be worth nearly 20 times as much as its medical counterpart.
In fact, demand is expected to be so strong, the country is expected to run out of weed.
The Great Canadian Weed Shortage
According to CIBC World Markets, Canada’s recreational cannabis market will have an initial size of about $5 billion per year.
And it’ll eventually double in size to $10 billion per year.
But that’s just the marijuana plant itself.
The total market - including segments like paraphernalia - is expected to be north of $22.6 billion.
Because of the rapid growth of Canada’s medical marijuana market, producers are having trouble keeping up with demand.
And when the country legalizes recreational use next year, there’ll be an estimated 4 million to 6 million users added to that demand…
In other words, there’s a Canadian weed shortage on the horizon.
The government is doing the best it can to deal with this. In May, Health Canada streamlined the process for growing applications. More importantly, it made it easier for the 45 existing producers to expand.
Unfortunately, growing the stuff takes time.
It can take six months to three years to get a new facility up and running at full speed.
So Canadian cannabis is going to be flying off the shelves next summer. I expect those shelves to be bare at the end of the first day of legalization. And then firms will be racing just to keep up with demand.
That’s partially because Canada is also only one of two countries that export marijuana. The other is the Netherlands. And all those countries legalizing medical use will probably need to tap Canadian producers for supply.
It’s a boom time for Canadian cannabis suppliers.
So while federal legalization in the U.S. is a question mark, the Canadian market is trying to stave off a supply shortfall.
And things just got even better for its biggest player...
Pump Those Brakes!
In my last column, I talked about how liquor - especially cognac and gin - is chipping away at beer’s dominance in the U.S.
I also discussed how the threat of marijuana legalization in the U.S. would gut beer even further.
Then, as if on cue, one of the most significant announcements in the history of the alcohol and marijuana industries transpired.
On Monday, Corona and Svedka vodka seller Constellation Brands (NYSE: STZ) announced it was putting down $191 million for a 9.9% stake in Canopy Growth Corp. (TSX: WEED; OTC: TWMJF), the biggest player in Canada’s marijuana market.
Shares of Canopy surged 30.4% in two days…
And to date, Canopy shares have nearly doubled in 2017.
Meanwhile, Constellation shares have chugged higher this year. That’s due to the fact that the company owns the only beer I believe is worth owning for the long term: Corona.
The Canopy stock purchase makes Constellation the largest shareholder in Canopy. And it could acquire more.
Canopy was already my No. 1 company in the marijuana space...
- It’s the premium weed producer in Canada.
- Its Mettrum Health acquisition last year gave it access to half of all of Canada’s medical marijuana patients.
- It’s an international player, operating subsidiaries in Germany and Chile, while expanding into Australia and Brazil.
- And it has a contract with the world’s most famous weed connoisseur, Snoop Dogg.
Constellation’s stake in Canopy values the company at more than CA$2.5 billion.
And the two are partnering to produce cannabis-infused adult beverages.
Hopefully these don’t taste like bong water. But this is the first deal of its kind. And they don’t need to worry about whether or not alcohol will be part of the mix. The law is open-ended on what they can create.
But what I have always loved most about Canopy as an investor is that the company operates only where it is federally legal to do so. This means there’s no undue risk to shareholders.
Canopy dominates the Canadian marijuana market and is the premier international player. The deal with Constellation sweetens the pot.
But don’t expect these to appear on the shelves of your local beer and wine store anytime soon. Canopy operates only where it doesn’t have to worry about a federal crackdown… And there are more than two dozen countries outside the U.S. to target.
Thoughts on this article? Leave a comment below.
Editor’s Note: Canopy is one Canadian pot stock Matthew sees as a good investment - but not the only one.
See why Matthew changed his mind about the marijuana industry - and how he’s helping subscribers cash in on it - in this exclusive presentation.