Weed Rush Down Under

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.

 

 

 

Pot Investors Go Up in Smoke

Marijuana investors are stampeding for the exit these past few days. Why? Well, in keeping with herd-like behavior, there isn’t a rational explanation. Rather, this is a classic example of investor anxiety running rampant.

Here’s what stoked a fearful run for the exit: Bill Blair, leading the Canadian Federal government’s legalization effort, commenting in the Globe and Mail on the timeline for recreational legalization stated, “We will take as much time as it takes to do it right. I’m pretty reluctant to suggest a specific time frame, frankly, because I don’t know how long this will take in each of our 10 provinces and three territories.”

http://www.theglobeandmail.com/globe-investor/investment-ideas/marijuana-stocks-drop-as-trudeaus-pot-czar-says-canada-wont-rush-into-legalization/article34230589/

It’s All Been Said

So, this comment alone is reason enough to bolt from pot stocks en masse? The thing is, Blair is not saying anything that hasn’t already been said. Consider the following:

  • November 27, 2016. The Globe and Mail quotes Anne McLellan, marijuana legalization task force chair, who says that marijuana will be moved “… from a criminal regime, where this was an illegal substance with criminal sanctions – some of them very serious – to a legalized product in a regulated marketplace. It’s important to move slowly, and deliberately, in implementation. [emphasis added]

http://www.theglobeandmail.com/news/politics/report-on-marijuana-legalization-in-canada-due-this-week/article33065608/

  • November 30, 2016. The Financial Post (FP) quotes Brendan Kennedy, CEO of private equity firm Privateer Holdings, “It’s a long path to legalization. Investors sort of have these expectations baked in that are unrealistic. I think January 1, 2019 would be optimistic … even 2020, when all said and done.” FP goes on to repeat Anne McLellan’s statement that ‘it is critical the government goes slow on reforming the laws. [emphasis added]

http://business.financialpost.com/news/agriculture/long-path-to-legalization-marijuana-companies-not-convinced-of-legal-recreational-market-by-2018

  • January 2, 2017, Canadian Broadcasting Corporation (CBC) reports “While the federal government plans to table its new marijuana legislation in the spring of 2017, it will take much longer to study the bill and eventually pass it into law. It will likely be at least 2018 by the time the legalization process is complete.”

http://www.cbc.ca/news/canada/toronto/marijuana-toronto-2017-1.3896575

  • March 2, 2017, the Canadian Department of Justice website states, “In the spring of 2017, the Government of Canada will propose to Parliament and Canadians a new legislative framework for the legalization of cannabis.”

Addressing the issue of when legalization will happen, the website states, “It’s a serious, complex matter that will take time.” [emphasis added]

http://www.justice.gc.ca/eng/cj-jp/marijuana/info.html

The Facts Please

There you have it. No new information was announced. Neither Bill Blair nor the Canadian government changed the game.

Any informed investor knows that, owing to the nature of the legal and consultative process, it is not possible to give an exact date on which marijuana will be legalized for recreational use. And any of the listed marijuana companies worth their buds know full well that the magic date may not happen until 2018, 2019 or 2020. And these companies have organized their business model accordingly.

On the face of it, the fundamental nature of the business of producing, distributing and selling marijuana remains the same; and the prospects for a massive market remain the same (report from Deloitte estimates a +$22 Billion industry in Canada – http://www.businessinsider.com/deloitte-weed-could-be-226-billion-canada-2016-10). Then why are investors panicking?

Chalk it up to blind fear and a crowd mentality where one lemming follows another off a cliff simply because that’s what the other guy is doing.

Unfortunately, too many investors are short-term players who pay too little attention to available information. These are the investors who foolishly sell at a loss, because they’re consumed with fear, then kick themselves when the stock bottoms and resumes its upward climb. The winners are those who sit tight or, better yet, realize the opportunity and buy stock at depressed levels.


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Enter Buddha

When fear and panic arise, accept these feelings. Recognize and make friends with them. But do not take action while in their grip. These feelings will pass. And once they pass, and your mind is clear, only then may you make wise decisions.


And Then There’s Organigram

A few days before the general downturn among pot stocks, Organigram Holdings Inc. (CVE:OGI) was hammered owing to filing of a class action lawsuit. The basis of the lawsuit is a claim that the company sold pot containing unapproved pesticides.

Now, if OGI had intentionally or grossly negligently spiked the weed to juice harvests, then it may well be on the financial hook for some serious dough beyond the retail cost of product. As importantly, if not moreso, the OGI brand would take a big hit, with the possibility that it would not recover. And a serious haircut to OGI’s stock value would be warranted, at least in the short term.

But none of the facts point to OGI being guilty of corporate shenanigans. Which brings up the question: what’s the deal with the extreme reaction by investors? Did investors inform themselves of all details concerning this issue or did they simply scramble to sell as soon as the plaintiff’s law firm informed the media of its filing? My guess is the latter.

The Facts Please

An exhaustive internal corporate investigation was unable to determine the source of pesticide traces. And Health Canada responded to the issue by:

  • Stating that it had not received any patient complaints about adverse reactions from product recalls;
  • Confirming its own test results determined that the affected products represent a low health risk; and
  • Declining to take any enforcement action against OGI.

That’s all fine and good but couldn’t OGI still be held liable for damages, or agree to a settlement payment just to make the lawsuit go away? Yes, to both of these questions.

Fortunately, the company employs a skilled management team that has taken the following actions to diminish any financial fallout from the lawsuit and, in the process, bolster its performance and its brand:

  • All potentially affected product were voluntarily recalled and destroyed;
  • Enhanced testing protocols, exceeding Health Canada’s regulatory requirements, have been implemented;
  • For the purpose of transparency, as of mid-March, 2017, future test results will be posted on the company’s website;
  • All customers who purchased affected product have been issued a credit equivalent to their cost;
  • According to OGI, the majority of its customers have accepted, and are using, the credit; and
  • Financial exposure has been minimized by allocating sufficient funds to cover losses related to the recall.

In addition, OGI’s currently suspended organic certification, which sets it apart from its pot growing peers, will likely be reinstated by Ecocert in March or April, 2017. Ecocert validates organic standards (http://www.ecocert.com/en).

Crystal Ball

Where will OGI go tomorrow and beyond? As you know, stock market investing does not offer guarantees. But if we keep our eyes open, if we take the time and exert energy necessary to fully inform ourselves about a particular investment, and not let emotions carry us away, then we stack the odds in our favor as far as good, and profitable, decision-making is concerned.

Full Disclosure: As of the date of this article, I’m a chilled shareholder of OGI.

 

Weed Stocks Flying High

Let’s have some fun here and introduce two fictional characters who will talk about the marijuana legalization movement, what this means for ‘pot stocks’, and what you should consider before partaking, either as an investment or otherwise. Oh, and it may be more fun for you if you pretend that the characters speak like Crush (i.e., the sea turtle in Finding Nemo: https://www.youtube.com/watch?v=ansWZq7yULE).

Act I. Two Dudes Talk Pot

Lotusflower. “Dude, what’s the deal? Is it, like, legal?”

Tree. “Partly dude, but not totally. For us California dudes, it rocks ‘cause weed is now legal for both medicinal and recreational purposes. But other States haven’t yet been blessed by the ganga god.”

Lotusflower. “Still, this definitely calls for a party.”

Tree. “You know who we should party with? Bill Clinton.”

Lotusflower. “He’s a politician man. Why would you want to party with a politician?”

Tree. “Dude, no judgment is our motto, right? Besides, it’s like, hey, remember when he was being grilled by those curmudgeons up on Capital Hill in the 1990s, and he messed with ‘em, saying he was fond of lighting up but didn’t inhale? Hah! That dude’s got chutzpah. Well, today, if he hangs with us in the golden state, he could totally admit inhaling because the authorities sitting up high have waved their magic wand and said, uh, ya, you dudes and dudesses of legal age can fire up the bong at your pleasure in California and other States too.”

Lotusflower. “All the States?”

Tree. “Not everywhere yet, man, but soon it’ll happen. For now, aside from the most rad State of all, California, it’s totally legal to toke for recreational and medicinal use in Colorado, Washington, Oregon, Maine, Nevada, Massachusetts, Alaska, and D.C. And there’s a whole bunch of other States that allow medicinal use only.”

Lotusflower. “Excellent.”

Tree. “Agreed dude. But what sucks is that the Federal government isn’t on board.The Feds still classify weed as a Schedule I narcotic, on par with heroin and LSD. Man, what planet do they live on? But those tighties in Washington are swimming against the current. Soon we’ll be like Canada.”

Act II. Canada Renamed WeedLandia

Lotusflower. “Canadians are cool. They’re like chilled Californians, you know.”

Tree. “Totally. And get this: the Canuck federal government has already made medicinal weed use legal across their whole, entire country. But that’s not all. Their government, run by this former snowboarding dude, is like going to make recreational use legal too. The dude actually campaigned for legalization when he was running for head office; how excellent is that! And the Federal Health Minister told her fellow dudes and dudesses at a United Nations General Assembly special session on drugs that Canada would introduce a legalization bill in the spring of 2017.

It’s not just political babble either. ‘Cause, like, real soon, this bureaucratic group known as the Task Force on Maple Syrup Legalization … um, wait, no, it’s called the Task Force on Marijuana Legalization, will release this special report detailing how to build the weed market so it minimizes criminal involvement, protects minors, ensures product quality and adds tax revenue. And the country’s largest pharmacy chain, Shoppers Drug Mart, (owned by the Canadian grocery giant, Loblaws; trading under the ticker TSE:L) is already talking with government folks about dispensing marijuana from its stores. Once big corporate gets involved, pot goes mainstream and it’s further legitimized in the eyes of the public.”

Lotusflower. “I love Canada.”

Tree. “Ya, when you think about, it’s this whole new industry that’s just getting started. It’s going to be huge, dude. I mean, is it any wonder that the major opponents to legalization are the pharmaceutical and alcohol industries? Pharma will lose boatloads of dough when people stop buying their anti-depressants and anti-anxiety meds. I mean, why not chill naturally, right, and avoid pharma side effects. With weed, I’m guessing they will have a warning label saying something like, careful dudes, you might laugh yourself silly on this stuff and eat too many potato chips. As for alcohol, it’s already been shown in Colorado that once pot gets the green light, alcohol consumption drops off.”

Lotusflower. “Hold on. You said the industry is going to be huge?”

Tree. “That’s my guess. Think about tobacco and if you invested in one of the big tobacco companies fifty years ago what your investment would be worth today. Now I’m not saying there are any guarantees that weed will infiltrate the masses to the extent cigarettes once did but serious demand is out there.”

Lotusflower. “Maybe I’ll invest? You know, make some money from the stock market.”

Act III. Ethics of Pot Investing
Tree. “You good with that? I mean, would you buy stock in a tobacco company?”

Lotusflower. “No way, those dudes are evil.”

Tree. “Then why buy a pot company? You and I both know the excellent benefits of pot but when you smoke it, it’s not exactly a balm for your lungs or throat or brain. We gotta be real here; there’s downsides, man, on the health front just like with tobacco. Anyway, your call dude. Search your values registry and figure out what works for you. It’s more important to be true to your nature than to make a few bucks on a stock investment that doesn’t connect with your soul.”

Lotusflower. “Ya, I’ll wrestle with that one. For now, let’s say I’m down with investing. You think I should?”

Tree. “Well, here’s the thing: the upside is that marijuana companies are growth companies meaning their future growth looks real good. In Canada, the recreational use market, expected to be operational by 2018, has an estimated worth of $10 billion, a fat round number wouldn’t you say? But never discount the risk. We don’t know how well run these pot companies will be, how much profit they’ll bring in or exactly what regulations the government will put in place and the degree to which those regulations might enhance or stifle the weed business.”

Act IV. America: Not Yet Open For Marijuana Business
Lotusflower. “Dude, Canada is, like, cool and all but why aren’t we talking about USA home grown companies for investing?”

Tree. “Because it’s a totally messed up legal framework in the good ole’ USA with pot being illegal at the federal level but legal in many states. The result of this disconnect is that American pot companies cannot export their stash outside the country; even though they have to pay federal taxes they can’t take advantage of corporate tax breaks that would increase profits; they can’t hire legitimate tax auditors because their business is technically illegal under federal law; they attract fewer investment dollars for research and development; and they can’t register patents or trademarks, and all these restrictions damage their global competitiveness. There’s too much uncertainty surrounding the American industry and the last thing investors want is uncertainty. Makes ‘em nervous and less likely to invest.

So with U.S. competition weakened by regulatory risk, Canadian companies are stoked. It’s like they’ve got this huge head start growing their business not only domestically but also internationally by partnering up in other countries. Right now, potential global markets include countries where the drug is legal at the federal level, including: Australia, Brazil, Chile, Costa Rica, Czech Republic, Germany, India, Italy, Portugal, Spain and the Netherlands.

American, Canadian and investors from other countries see what’s happening and are piling into Canadian listed marijuana stocks precisely because of their competitive advantages that primarily include: a clear legal framework and, having already built Earth’s most advanced large scale commercial medical marijuana program, they’re itching to ramp up production once the recreational market gets a green light. The result being international demand for Canadian bud producers to share their expertise in exchange for fees and royalties, and the opportunity for the Canucks to burn their reputation as industry leaders.”

Lotusflower. “Right, so, um, we should hitchhike north across the border and invest?”

Act V. Investing in Pot Stocks

Tree. “Let’s talk it through first, dude. ‘Cause you know, I’ve been following the pot stocks traded on the Toronto Stock Exchange and the TSX Venture Exchange (the Venture Exchange is for smaller companies). And, here’s the thing: there’s huge speculation going on and this is making the shares crazy volatile. I mean, within a five day period last week, you’re seeing price swings up t0 50%! Not only that but some shares of these companies have already risen several hundred percent in the past year. And that just isn’t normal so you don’t necessarily want to run with the bulls on this one ’cause bulls are fueled by animal spirits, not thinking brains.”

Lotusflower. “So what are we waiting for? Get out your thumb ‘cause we’ve got to catch ourselves a ride!”

Tree. “Not so fast Loflo. I mean, sure, stocks have been on fire. But here’s what you have to do: look at the price today, then wipe the dust off your crystal ball, peer inside, and look at where the company will be one or two or five years from today.”

Lotusflower. “Seriously, dude?”

Tree. “Well, that’s what investors do; try to predict future performance. So if you think that there’s a whole lot of folks around the globe who will opt for a joint, a weed infused chocolate bar or a magic brownie, instead of downing a beer or sipping chardonnay, then dude, this is just the beginning for these stocks.”

Lotusflower. “Go back to that crystal ball of yours. What do you see?”

Tree. “I’m looking at the success story of Colorado and other early State adopters of legal weed laws; and I’m looking at governments getting all hot and bothered over the tax revenue they’ll be collecting; the number of people who already know the benefits of weed, and the many others who will seek entry to the weed pleasure dome as an alternative entertainment source or as a substitute for a chill pill; the amount of money raised by these companies (for example, Aphria [TSX-V:APH] and Organigram [TSX-V:OGI] – both recently raised $35 million (CAD) through underwriters, selling shares at a fixed price); and I’m looking at big time corporations wanting a piece of the action (see Shoppers Drug Mart above) and my ball says this:

Share price volatility has been insane. Nutty speculation is going on. But, this isn’t a bubble. These are real companies doing business in a new industry with significant growth prospects. Volatility will eventually calm. And if you have an investment time horizon between two and five years, then now may be the time to wade in. Still, dude, this is just my one lonesome opinion. Think about what I’m saying and do your own research before you dive in. And remember, if you can’t afford to lose, then you shouldn’t make the investment.”

Enter Buddha. I will tell you a story. There was a man named Andrew Carnegie. Perhaps you know of him, the richest man of his time. When he was dying, his biographer asked, ‘are you content?’ And he replied, ‘no, my life has been a failure’. Surprised, the biographer said, ‘With all your money, how could you not be content and fulfilled.’ The dying man responded, ‘that logic destroyed my life.’

Money may purchase many things, but not contentedness. Rather, being content arises from inner richness, from knowing your true nature and doing what is right for you.