Cannabis Investors Bracing for a Dose of Reality in Canadian Markets

cannabis investors
One of only three marijuana-testing labs in Alaska has shut down. (File image via AP)

What will be the size of the reactional market? How many Canadians will convert to buying weed the legal way? These questions leave cannabis investors searching for answers and credible data.

The green rush took full effect at the start of 2018. Canadian weed shares are soaring as the federal government prepares to displace the illegal economy functioning country-wide. Licensed producers (LPs) are scrambling to bolster their production and refine their methods in-time.

There are even retail strategies being drafted with the largest in the industry. Firms must work out specific distribution methods across the country and the targeted branding of their products. These specific fine-tunings are all being made before the federal laws are finalized and without provinces spelling out the rules and price for sale.

The lack of certainty has left Canadian cannabis investors with a whole lot of questions.  “There are still a lot of unknowns,” according to Neil Closner, CEO at MedReleaf Corp. He says,

“We have to try to anticipate and have a few scenarios, the ones we believe are most likely to take place. And we have to be able to react quickly. A lot of it comes down to execution.”

image - Cannabis Investors Bracing for a Dose of Reality in Canadian Markets
Snapshot of the growth of Canadian companies in 2017. 

Unknowns Not Scaring away Cannabis Investors

The lack of clarity has certainly not stopped the savvy investors. Trading in marijuana stocks has exploded with the start of 2018. As of today, LPs are only permitted to sell to medical patients. However, investors are evaluating stocks not on what the companies have sold to their patients, but on how much they may be able to sell in two or even three years. Closner believes execution risk has not be accounted for. He says,

“What appears to be the case is that the market is valuing companies on total announced production capacity. Period. It doesn’t take into account that they may not be able to do it. There’s no execution risk being factored in.”

For example, MedReleaf’s stock is worth $2.6-billion and has recorded $41-million in revenue in past 12 months. On the other hand, Aurora Cannabis only posted $23-million worth of sales in the last year yet it has a market cap of $5.4-billion. So, what is driving the difference in share prices between firms?

Success Determined by Effective Marketing

Jay Wilgar, CEO at Newstrike Resources Inc., thinks 2018 will be the year investors and analysts focus more on how products are marketed and less on square footage. He says,

“You never hear a beer company brag about how they have 800,000 acres of barley fields. That is not how it works.”

Wilgar has a point. It will likely be companies with targeted marketing and dedicated public relations teams that achieve success. And going back to Closner’s point, said success will largely depend on execution. Canadian companies might have to expand internationally to extend their market caps.

Canadian cannabis companies have already done business in places such as Germany, Israel, Spain, Australia, Chile, Brazil, Jamaica and the United States, where the drug is legal in certain states but illegal under federal law.

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