Weed Rush Down Under

australia

I’ve written about marijuana stocks a few times now. And I’ve had feedback from some kind, respectful folks saying, ‘no disrespect intended BuddhaMoneyLama dude but … the legal marijuana industry is only just learning to crawl and, as a result, these are high-risk plays that BuddhaMoneyLama has no business recommending’. Sure, no problem, point well taken since I fully stand behind the wisdom of investing for the long term in passive index funds.

That said, for clarity’s sake since clarity is a good thing when communicating ideas, when I post about marijuana related stocks or any other individual stocks, my purpose isn’t to recommend that readers buy this or that stock. Not at all. Instead, my purpose is to inform, educate, apprise, and enlighten readers. And I do this about a host of issues, as any BuddhaMoney member will know. Whether or not you want to try juicing performance returns with individual stocks, that’s where you’re going to have to step up and consider the pros and cons.

Still, I’ll go the extra word or sentence here to be extra clear, doubly clear, as clear as clear can be, and say that this post, concerning the fledgling Australian Marijuana Industry, is not meant to persuade, cajole, convince, encourage, sway or induce you to call your broker and place a trade on the Australian Stock Exchange. But if you do venture into weed Down Under, know the risks involved, know the share price volatility to be expected and, as with any investment, do not make that investment unless you can afford to lose.

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Aussies Moving Momentum Forward

Marijuana has already been legalized for medicinal purposes in twenty-nine American States and D.C., Canada, Chile, Czech Republic, France, Germany, Israel, the Netherlands, and Uruguay. And eight States, D.C., and Uruguay have legalized recreational use while Canada is expected to make recreational pot use legal nationwide sometime in 2018.

Now, the Australian government is positioning to further break down the pot taboo. Following the lead of these other countries, Aussies have amended laws and regulations to allow marijuana use for medicinal purposes. The investing community’s response? Stock market investors are bidding up any publicly traded company that so much as hints at partaking in the weed business.

 

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Regulatory Regime Change

Stock market action started heating up when the Australian government took concrete steps aimed at de-criminalizing marijuana. Here’s a brief rundown of what has happened in the past year:

February 24, 2016. With political support across the ideological divide, government amended the Narcotics Drug Act to allow for growing cannabis and cannabis related products for medicinal purposes. Under new regulations, patients with a valid prescription can possess and use medicinal cannabis products manufactured from cannabis legally cultivated in Australia.

February 17, 2017. Nearly one year later, Australia issues its first Medicinal Cannabis Research License to Cann Group Ltd. (ASX:CAN). The license permits Cann Group to cultivate medicinal cannabis and conduct research on the use of cannabis for medicinal purposes, including the formulation of medicinal cannabinoid oil, of consistent quality, for a range of medical conditions.

February 23, 2017. Acknowledging that local supply is unable to satisfy demand, government enables faster access to import marijuana from approved international suppliers.

One such supplier is Canada’s Canopy Growth Corp. (TSE:WEED), the largest publicly traded marijuana company with a market value near $1.5 billion (CAD). Canopy supplies AussCann Group Holdings Ltd. (ASX:AC8) with all of its marijuana.

A second supplier is Canada’s Aurora Cannabis Inc. (CVE:ACB), market cap more than $600 million (CAD), who is Cann Group’s supplier.

March 8, 2017. Australia issues its first Medicinal Cannabis Research License to Cann Group Ltd. This license allows Cann Group to grow and harvest pot that may be prescribed for patient use.

May 5, 2017. Australia issues its second Medicinal Cannabis Research License to AussCann Group Holdings Ltd.

 

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Weed Gone Wild

As the Australian government is making good on its promise of legalization, shares of companies involved in the cultivation, production and research of medicinal marijuana have zoomed up an average of 130%. The major players include:

  • AusCann Group Holdings Ltd. (ASX:AC8) trading at 20 cents in mid-February, 2017, has increased more than 220%, closing March 8 at $0.65. Interestingly, the largest shareholder (10.6%) of AC8 is Canopy Growth Corp. (TSE:WEED).
  • Cann Group Ltd. (ASX:CAN) raised $13.5 million (AUD) via IPO at $0.30/share. Opening for trading on May 4, 2017, the closing price of CAN on May 8 was up more than 130% at $0.70. Another note of interest: Aurora Cannabis Inc. (CVE:ACB), owns 19.9% of CAN.
  • Hydroponics Company Ltd (ASX:THC), also started trading May 4, 2017, opening at $0.33 and closing May 8, 2017 at $0.385.
  • Zelda Therapeutics (ASX:ZLD), traded at 4 cents a year ago then completed a $6 million (AUD) private placement at seven cents per share. Closing price on May 8, 2017, was 10 cents.
  • MMJ Phytotech (ASX:MMJ), 24 cents a year ago, soared to 83 cents in March, 2017, and now sits at 42 cents.
  • Creso Pharma (ASX:CPH), trading at $0.26 in October, 2016, saw a healthy bump up to $0.64 as of May 8, 2017.
  • Stemcell United (ASX:SCU). Stock movement of this stock is outrageous, reminiscent of the wild west dot com early days of the mid to late 1990s. Consider: prior to announcing it would change tack and move into the marijuana space, SCU was effectively worthless, trading at one penny. Then, on March 14, 2017, the company issues a press release stating, “SCU to pursue opportunities in Medicinal Cannabis sector.’ And speculators proceed to lose their collective mind, bidding up share price to $1.09 (you read that right) and closing at $0.41. Keep in mind that the company has not announced any concrete plans whatsoever regarding its proposed transformation, has no revenues, and nothing in the pipeline. Smart traders recognized the temporary mania and got out quick with profit in tow. As of today, the stock price remains over valued but has been reduced to $0.14.

Its early days in the budding Australian marijuana market. And with extraordinary investor interest, some industry players are seeing extraordinary share price gains, not unlike Canadian marijuana companies during their early trading days.

That said, if you’re so inclined, who do you back at this stage? That’s where the high risk comes in. With local companies having a market cap much less than $100 million (AUD), and with speculation rampant, predicting eventual winners involves a bit of a roll of the dice. Still, anyone interested in placing a bet would do well to consider those companies who have secured a competitive, Canadian flavored advantage.

 

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Canuck Connection

What’s with the Canuck connection to the two Australian pot horses that have jumped out of the gate and into the early lead?

Well, Canadian pot producers have established themselves a well-deserved industry leading reputation. First off, owing to a clearly formulated government regulatory regime allowing medicinal pot use since 2001, and with the green light expected for nationwide recreational use in 2018, they are years ahead of pot companies in other countries.

The result being that Canuck operated companies have grown much larger and are more experienced than the vast majority of competitors. This places Canadians in the enviable position of transforming into multi-nationals who supply pot and expertise to earlier stage companies such as AussCann Group and Cann Group.

And the longer it takes governments of other countries, especially the American federal government, to let go of their dated anti-drug laws, the more time Canuck producers have to establish international partnerships, create higher barriers to entry, and build themselves a good ole’ moat.


Crystal Ball Gazing

Yes, it’s early days. Yes, it’s a high risk, high reward scenario. Yes, available investments are in relatively small companies with minimal, if any, industry know-how. And if the experience of other countries who are walking the weed legalization path is any guide, Australian laws and regulations will continue to loosen in support of widespread use of marijuana for medicinal purposes.

As for recreational use, all signs point to this happening too, but it will take more time. And during this time, the legal market will continue to grow, and some of the early entrants will be around one, two and ten years from today, as the industry matures, as weed goes as mainstream, and the current frenzy eventually quiets.