WMA Cara Report for week ending May 25, 2018
  • May 25, 2018 08:04 pm
  • by Bill Cara & Owen Williams

Cannabis. Budding Opportunity or Bubble?

 

The American public is recognizing that the U.S. cannabis industry is developing rapidly. Many of us on the inside understand there will be no holding back because cannabis, like cell phones (the IBM Simon introduced digital mobile phones in 1990) and then the Internet (which became publicly available August 1991), is well on the way to becoming only the third new global industry of the past 40 years.

The status of the industry today depends on jurisdiction. Led by youthful Prime Minister Justin Trudeau, Canada is a world leader. So is Israel. Due to archaic federal policies, the U.S. is playing catch-up. But even Canada where federal legislation to legalize full medical and recreational usage is anticipated this summer, the provinces have the right to “self-regulate” and the industry is known as the “wild-west”.

So much capital has poured into the industry (more than US$2.7 billion globally just in 2017 including half to Canada and almost $10 billion in total so far) with almost 300 companies having gone public, most in the past two years.

Share prices are trading at such astronomical numbers that investors are now asking an important question: Is cannabis a budding opportunity or a soon to burst bubble?

We refer to “astronomical numbers” because there are no meaningful metrics. Acquisitor companies like Aurora Cannabis, which just announced a take-over of MedReLeaf to form a company with a market value of some US$5 billion, would not disclose a definition of metrics used for this multi-billion acquisition or others they would consider. Interviewed on BNN-Bloomberg, the CEO appeared flustered and then said it was a “secret formula”.

This year, the research firm ArcView, in partnership with BDS Analytics, published The State of Legal Marijuana Markets – 5th Edition. “The Road Map to a $57 Billion Worldwide Market” report was issued in February. Finding numbers that are meaningful to investors and entrepreneurs alike, however, is like pulling rabbits out of a hat.

The ArcView researchers did say they found that legal cannabis sales soared 33% in 2017 to $9.7 billion and could be $22 billion in 2021. A decade from now, they project North American sales topping an estimated $45-70 billion.

In the U.S., the impressive growth in recent years is due to a combination of state- and country-level expansion, as well as a major shift in the way people perceive and consume cannabis. In its October 5-11, 2017 survey, national pollster Gallup found that 64% of the American public now favor the idea of legalizing marijuana for recreation use. That’s up from just 25% in 1995, the year before California became the first state to legalize medical cannabis for compassionate-use patients. Since 1996, fully 29 U.S. states have legalized cannabis in some capacity.

As historical stigmas have been replaced by legal and viable medical and recreational usages, the emerging industry has been attracting people from small entrepreneurs to Fortune 1,000 multi-national companies. In fact, the huge alcohol producer Constellation Brands (NYSE:STZ), invested in 9.9 percent equity of Canopy Growth Corp, which trades on the Toronto Exchange under the ticker WEED and which this week began trading on the New York Stock Exchange (CGC).

This activity has signaled the increased credibility of the cannabis business to the overall market. As more countries enact the enabling legislation, and they will, there will be no end to the stream of usage and employment.

Upon his recommendation, an adjunct professor at a major U.S. university who is a business associate of Bill Cara surveyed the literature in recent weeks and then submitted a course outline to the Business School Dean. We will elaborate on the academia matter later in this article; but here is a summary of his notes:

Overview of Business Opportunities

The cannabis industry is bursting with entrepreneurial opportunities:

  • In many States of the US, cannabis entrepreneurs are legally growing, harvesting, and infusing products with cannabis in record numbers.
  • With the increasing number of cannabis enthusiasts and cannabis entrepreneurs, more and more business opportunities are sprouting up.
  • While we still have a long way to go in cannabis education and dismantling unproductive stigmas, the tide is steadily turning as cannabis becomes more widely accepted.
  • If you’re interested in joining this new industry and starting a cannabis-focused business of your own, here is a list of promising cannabis business venture ideas where you may be able to find your niche…and passion:

Cannabis Production

Cannabis cultivation for profit includes:

  • Harvesting and selling cannabis flower.
  • Selling harvests to processors for concentrates, edibles, and other products.
  • Breeding cannabis seeds and selling them to other growers.
  • Breeding and Trademarking a Cannabis strain to create premium branding and pricing.
  • Producing cannabis clones and “tissue culture”, then selling them to dispensaries.

Cannabis Dispensaries

One of the most obvious cannabis industry ventures that an entrepreneur can pursue is opening a dispensary:

  • According to a recent Gallup poll, roughly 12% of Americans consume cannabis on a regular basis. In legal states, people can make purchases at licensed retail outlets.
  • If you’ve ever dreamt of running your own store (but with cannabis), this is the best way to realize your dreams.
  • To get started check to see if local laws support the sale and distribution of cannabis.

Cannabis Edibles

  • Edibles are quickly gaining momentum in the cannabis industry, largely because they are discreet and can be consumed anywhere anytime.
  • They are also preferred by consumers that wish to avoid smoking cannabis or who just want long-lasting effects
  • According to BDS Analytics, edibles made up 12% of the market share in Colorado, Washington and Oregon in 2016.
  • Cannabis overall will potentially exceed the entire North American carbonated soft drink market (2018 estimated to be $78 billion), within 10 years.

Cannabis Accessories

  • Selling the plant requires one to have special licenses, and if you feel you don’t want to handle the plant in any way, there are other options, such as selling accessories useful to cannabis enthusiasts.
  • The accessories option lets you steer clear of the potential bureaucratic challenges of cannabis cultivation and distribution.

Cannabis Real Estate

  • Establish ‘picks & shovels’ infrastructure for growers and distributors.
  • Build out greenhouses and storage facilities, then lease to Cannabis entrepreneurs.
  • Consolidate ownership and package into a REIT.

Cannabis Public Relations

  • With cannabis many businesses struggle to get coverage beyond the trade publications and really want to increase their regional and national profile.
  • If you have a knack for PR and a solid network of journalists and reporters, you could potentially add a lot of value to many businesses throughout the industry.
  • You can help educate and orientate writers and journalists to dismantle a lot of the harmful stigma and misinformation that Cannabis has endured for way too long.

Technology Developer

  • New businesses, as well as established ones, are often seeking technical help in creating software programs and developing apps to make their business operations easier.
  • Cannabis businesses face these same challenges in technology, possibly more so.
  • With the rise in cannabis-entrepreneurs and online retailing businesses who desire to make their line of work easier, there will be a greater need for software developers moving forward in the cannabis space to develop mobile apps.
  • If you are looking to put your coding skills to work in the cannabis industry, trust that the demand is very strong for such skills.

Cannabis Security Services

  • Currently, many banks and financial transaction processors refuse to accept business from the cannabis industry.
  • Until that changes, the demand for security services (e.g. transportation, surveillance, ID verification, and storage of cash and product) in the cannabis industry will be extremely strong.
  • Even if/when banking rules change and the lingering stigma surrounding the cannabis industry fades, there will still be a need for security services in the cannabis space.
  • The cannabis industry involves a tremendous amount of cash, and as such, there’s a need to protect it from would-be thieves.

Cannabis Event Planning

  • More and more people are opening up about personal cannabis use, and this entrepreneurial opportunity is a great way to have fun while also generating profits.
  • The cannabis space has experienced exponential growth in demand and frequency of business and social events include: Networking events, Trade shows, Social gatherings, Music, Nat’l conferences culture festivals, and Weddings.

Other:

  • Cannabis Bed and Breakfast Inn

  • Cannabis Painting Classes

  • Cannabis Guided Tours

  • Cannabis Consulting Services

 

We will not get into our associate’s Course Outline for his School of Business, but will present his Course Summary:

This innovative course will review the “science” of Cannabis, the evolving legal landscape, and the real BUSINESS opportunities for enterprising entrepreneurs. Our approach will focus on:

  • Understanding the underlining business environment and various business models that may be successful.
  • A comprehensive overview of the cannabis enterprise value chain will be essential in identifying the various inefficiencies and the subsequent venture opportunities that will impact and enhance the industry.
  • Understanding market forces and strategic competitive responses will be critical to an overall understanding of this growing industry.
  • Specifically, Big Tobacco, Big Alcohol, Big Pharma, Big Coffee and even Big Cola companies are scrambling to participate in the Big Cannabis industry.

We did remark to our associate that the interest level in his new course will be “high”. He agreed while also responding that he believes about 30% of the students in his other courses are cannabis consumers today.

It is time for education at all levels because clearly, despite the market risks, cannabis investors have taken a fancy to the stock market. Our market analytics research already involves the daily capture of almost 50 datapoints on almost 300 cannabis-related stocks that trade on NYSE, NASDAQ, OTCBB, Toronto and Toronto Venture markets. We have just added extensive historical data for each of these stocks to our sophisticated PostgreSQL database and have begun to input fundamental data. One programmer is working on the application of trading algorithms.

At some point soon, we shall be positioned to open a cannabis portfolio investment strategy, making it available to Americans at FOLIOfn. Our securities lawyer called the interest “radioactive”.

Future weekly articles will be discussing our information and observation of many companies you will likely be reading about in mainstream media, such as (among a great many others): –

  •  Aphria Inc (APH.TO)(APHQF)
  •  Aurora Cannabis Inc (ACB.TO)(ACBFF)
  •  Canopy Growth Corp (WEED.TO)(CGC)
  •  Cronos Group Inc (CRON.V)(CRON)
  •  GW Pharmaceuticals (GWPH)
  •  Scotts Miracle-Gro Co (SMG)

Conclusion

Stereotypical images of cannabis, such those of 1970s hippies rolling joints, are fading. With more and more scientific studies, the medicinal value of cannabis is beginning to surpass that of recreational use in the eyes of the public and government officials. Socially-responsible investors need not shun cannabis investments in the same way as they do for tobacco and alcohol companies. Cannabis is a real investment theme to follow and, we believe, will prove to be profitable for long-term investors.

Something to think about:

Countries around the world are legalizing cannabis. It’s time to get past the stigma.


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