High times for weed stocks?

As another weed company enters the Canadian stock market, the word 'bubble' is popping up

by Vanmala Subramaniam
Dec 8 2016, 3:10pm

The growing number of weed investors now have another treat to add to their basket—CannaRoyalty. Shares of the brand new Ottawa-based company began trading publicly on the Canadian Securities Exchange—an alternative stock exchange in Canada that basically professes to reduce barriers to listing. Point is, you can now buy CannaRoyalty stock that will trade using the symbol CRZ.

Just to clarify, CannaRoyalty is not a weed producer—it provides capital to licensed cannabis businesses in exchange for royalty on their revenues. What’s interesting about CannaRoyalty listing on the CSE is that investors will now have the option of dipping their toes into the American marijuana-producing market for the very first time. CannaRoyalty’s portfolio includes 18 marijuana companies, 15 of which are American-based.

Because weed is considered a Schedule 1 narcotic in the US, and medical use is illegal federally, you can’t actually buy American pot stocks. Current options to invest in the US marijuana market are limited to a handful of pharmaceutical companies listed on the NASDAQ that develop cannabis-based drugs.

“With the start of public trading, we are delighted to provide CannaRoyalty investors with access to high value assets that cover the full spectrum of the cannabis market in both US and Canada,” said CannaRoyalty’s CEO Marc Lustig in a press release. CannaRoyalty’s assets were valued at approximately $150 million before it was listed, but the company has still declined to say what it’s opening stock price will be.

Bubble territory?

Investors have been deliriously optimistic about Canadian weed stocks in the last month or so. The US vote to legalize marijuana in California, Massachusetts, Nevada, and Maine, combined with the impending legalization of weed in Canada in early 2017 has a created an irrational exuberance of sorts at the potential size of a recreational market.

Just last week for instance, the stock of International Cannabis Corp (listed on the Canadian Venture Exchange as ICC), went absolutely bonkers, surging 356 percent within a few days of going public. Canopy Growth Corp (CGC), another ridiculously popular weed stock (same owners as Tweed Inc.) became the first marijuana unicorn—a term used to describe start-up companies that are valued at over $1 billion.

Chris Damas, a long-time analyst at the independent investment consulting firm BCMI Research draws a parallel between the enthusiasm of weed stocks to the bullish sentiment for tech stocks during the dotcom bubble of the late 1990s/early 2000s.

“When you have a venture capital sector that is emerging like marijuana, expect to see a lot of volatility, a lot of speculation. It was the same with internet stocks and Chinese rare earth mineral stocks,” he told VICE Money.

Damas believes one of the most important factors in determining if the marijuana sector is poised for growth is to correctly assess the potential size of the legal recreational market. On that front, he’s pessimistic. “Look, many people are going to find the product standardization and obtaining weed from a government regulated retailer problematic. It’s 3 AM, you’ve come out of a club at Richmond Street—what store is going to be open?”

A recent report by the Office of the Parliamentary Budget Officer (PBO) studying the fiscal considerations of legalizing marijuana expects the number of cannabis users aged 15 and over to grow by more than half a million, rising to over five million in 2021. More importantly, the report concluded that if illegal and legal weed prices remain competitive, a whopping 98 percent of total cannabis consumed, both recreational and medicinal, would be from legal purchases. That number basically assumes that the illicit market for weed will be practically wiped out post-legalization.

“I absolutely do not think that is going to happen. It’s an overestimation.” says Damas. “In (the state of) Washington, illegal weed still occupies 28 percent of the market!”

Regardless of what might drive the long-term fundamentals of the weed industry globally, it’s clear that Canada has a legislative advantage for the time being—driving companies like CannaRoyalty north of the border.

“For us, this is the most interesting place to be trading,” the CEO of International Cannabis Corp. Guillermo Delmonte told Bloomberg in an interview recently. “Canada is perfect for cannabis companies because it is a market that is most familiar with cannabis.”

Vanmala Subramaniam is VICE Canada’s Money & Economics Editor. Follow her on Twitter.

**Correction: This article incorrectly stated that a PBO report expected 98 percent of legal cannabis sales to come from those who consume weed recreationally. In fact, the 98 percent figure is the total cannabis consumption volume — recreational and medicinal — that would come from legal consumption.

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