How to Invest in the Canadian Legal Cannabis Industry

Canada's Newest $22.6 Billion Opportunity

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Canada may be best-known for its natural resources, including oil sands and precious metals, but there’s a new industry that’s rapidly gaining traction. After legalizing marijuana for medical and recreational use, analysts believe that the country’s cannabis industry could reach $22.6 billion in annual revenue, which is more than the combined value of the beer, wine, and spirits industries a — large figure by anyone’s measure.

In this article, we will take a look at how to invest in Canada’s legal cannabis industry and how investors can build exposure into their portfolios.

Large and Growing Market

Canada’s cannabis industry could reach $22.6 billion in annual revenue, according to Deloitte, which would eclipse the beer, wine, and spirits industries combined. The analyst firm believes that demand could edge up to 600,000 kilograms per year, which is far more than the existing 38 licensed producers are capable of growing, harvesting, and processing. It has created an attractive opportunity for both licensed producers and ancillary products and services.

Unlike the United States, Canada’s cannabis industry has been legalized on a federal level, which provides greater safety for companies operating in the space. The country legalized medical marijuana in 2001 with the Medical Marihuana Access Regulations (MMAR), which allowed more than 40,000 licensed individuals to grow the drug. These program has since been institutionalized (e.g., corporate growers) and will be expanded to recreational use in 2017.

Canada could also become a leading cannabis exporter over the coming years as one of the only countries with a federally-approved industry that can produce the drug at scale. As of mid-2016, two licensed producers have secured licenses to sell their products in Europe, while providing technical expertise to companies in other countries. Medical marijuana has been legalized in many of these markets despite very strict rules surrounding production.

Investment Opportunities

There are many different opportunities for investors within Canada’s cannabis industry.

Licensed producers represent the largest and most pure-play option for investors since they enjoy exclusive rights to grow, harvest, and process marijuana into flowers, extracts, and edibles. As of February 2017, there were only 38 producers holding a valid license from Health Canada following a lengthy approval process. Deloitte reckons that these companies could generate upwards of $8.7 billion in annual revenue.

Some of the largest publicly-traded licensed producers include:

  • Canopy Growth Corp. (TSX: WEED) (OTC: TWMJF)
  • Aurora Cannabis Inc. (CSE: ACB) (OTC: ACBFF)
  • Aphria Inc. (CSE: APH) (OTC: APHQF)
  • Mettrum Health Corp. (CSE: MT) (OTC: MQTRF)
  • Supreme Pharmaceuticals Inc. (CNSX: SL) (OTC: SPRWF)
  • Organigram Holdings Inc. (CSE: OGI) (OTC: OGRMF)
  • CanniMed Therapeutics Inc. (CSE: CMED) (OTC: CMMDF)
  • Emblem Corp. (CSE: EMC) (OTC: EMMBF)

Ancillary markets, such as testing labs, infused-product makers, and security firms, are poised to capture a further $13.9 billion in annual revenue, according to Deloitte. While the revenue opportunity is larger, there are many more companies targeting these areas of the market compared to less than 50 licensed producers due to government restrictions. These companies offer the opportunity to diversify away from purely growing into ancillary industries.

Risk Factors to Consider

Cannabis has widely used for thousands of years, but since the 1940s, the drug has become illegal in many countries thanks to the U.S.-led War on Drugs. In a surprising twist, the U.S. has become among the first major countries to begin decriminalizing the drug on a state-by-state level. Despite these trends, the drug remains illegal in many countries and faces regulatory risks on a federal level in the United States.

Canada’s cannabis industry may be well-established on a federal level, but there are still many risks that investors should consider. Companies operating in the space could face risks when it comes to exporting the drug, which could become an issue over time as the domestic market becomes saturated and export markets become a key growth driver. Many companies are also traded over-the-counter with somewhat limited trading volume in the U.S.

The Bottom Line

Canada may be best-known for its energy and precious metals industries, but the cannabis industry has emerged as its fastest-growing industry. In addition to 38 licensed producers, there are hundreds of other companies that produce ancillary products and services. Investors may want to consider these companies for their portfolios, although it’s important to be cognizant of the risks associated with these companies and the wider industry.