The marijuana market in Canada is prepped for additional growth: several companies plan to go public in 2017 since the country's regulations are more favorable, giving investors more options in this growing sector.
Companies are choosing to file their IPOs in Canada because of the more restrictive environment in the U.S., said Michael Berger, founder of Technical420, a Miami-based company that conducts research on cannabis stocks, and a former Raymond James energy analyst. The legal cannabis market expanded significantly during the past year and medical marijuana is now legal in countries such as Australia, Germany, Canada, Uruguay and Colombia. By 2018, Canada's legal recreational cannabis market should generate over $10 billion a year.
"One theme we recognized over the last year is an increasing number of companies listing on Canadian stock exchanges," he said. "These companies are choosing to list in Canada due to better business policies."
The number of registered patients is growing at a rapid pace in Canada as licensed producers continue to find innovative ways to create value for its shareholders. The number of patients is nearly 200,000 and growing 10% on a month over month basis, Berger said. The liquidity in the market is also beneficial for investors.
"In Canada, companies can use bank accounts, claim taxes, and write off business expenses legally unlike the U.S. where cannabis companies cannot do any of that and are frequently switching banks on account of their account being closed due to the focus on the cannabis industry," he said.
The Canadian marijuana market and legislation is outpacing the U.S. because Canada has legalized medicinal and recreational marijuana on the federal level, said Jason Spatafora, co-founder of Marijuanastocks.com and a Miami-based trader and investor known as @WolfofWeedST on Twitter.
"Canada has allowed licensed producers of cannabis to take their companies public in a meaningful way compared to the U.S. since there are still American companies which do not touch the plant directly," he said.
The Next Canadian Cannabis IPOs
A medical cannabis producer, The Green Organic Dutchman Holdings, is planning to go public in the second half of 2017, said Berger. The company cultivates medical marijuana under Health Canada from a 100-acre farm in Ancaster, Ontario and has already completed two oversubscribed financing rounds with over 2,500 investors, "which is a testament to the company's leadership and success," he said.
One factor investors need to consider is the track record of the management team and The Green Organic Dutchman has "one of the best in the industry," Berger said. "The management team has a proven track record and they were the team that brought together OrganiGram (OGRMF) and Emblem Corp. (EMMBF), two successful Canadian licensed medical cannabis producers. Although the team's role with those companies was different, they learned invaluable lessons which have also been implemented in this company."
Compared to its competitors, the company has differentiated itself by growing organic cannabis and is levered to a market that is experiencing a 10% on a month-over-month basis on sales.
"The Organic Dutchman is part of a rapidly growing market, generates a strong balance sheet and consists of several strategic partners," he said.
High Street Capital Partners, a New York-based real estate company that owns and operates cannabis cultivation facilities and dispensaries in 14 states across the U.S., could go public by the summer.
Although High Street is levered to the U.S. market, the company plans to list in Canada due to better regulatory environment. The company is an attractive opportunity since it has over 60% of the market share in Maine, 11 dispensaries in Illinois, one of the largest dispensaries in the Boston area and other attractive and profitable locations, said Berger.
Based in Ontario, CannTrust, a federally regulated licensed medical cannabis producer, is also planning to go public on the TSX this year. The company is an "attractive" opportunity, because it brings more than 40 years of pharmacy and healthcare experience to the cannabis industry. The company offers various proprietary products, operates out of a 40,000-square foot state-of-the-art hydroponic facility and its lab conducts testing and research on their products.
Risks in Cannabis Stocks
The risk of investing in IPOs for retail traders can be high, especially if they are not familiar with the industry since it is a nascent sector.
"For traders like myself IPOs are only interesting to me if they're in an emerging market or if as a private company they have solved a problem or created a revenue generating efficiency," said Spatafora. "IPOs do help fund innovation occasionally on a global sense, but they also pull liquidity from sectors and break hearts such as Snapchat."
The most recent Canadian company to go public was medical producer Emblem Corp. (EMMBF), which went public on the TSX Venture Exchange in December 2016.
"This offering was nothing short of success," said Berger. "Retail accredited investors purchased shares at $0.75 and $1.15 before the IPO. Once the shares commenced trading, Emblem was trading above the $3 level."
Although the cannabis market is burgeoning, some newcomers could wind up not being profitable for several years. Choosing the winners is not always an exact science. Investors should be wary and conduct due diligence since popular stocks are not always profitable.
"Cannabis is an emerging market and as an investment it is a once in three generation opportunity that is barely through its first inning," Spatafora said. "Just like dot com investors needed to pick their spots to invest in, people should not make just any marijuana investment."
Investing in an early stage company is often riskier, said Berger.
"While the cannabis industry is the fastest growing industry in the world, leaning to an influx in the number of cannabis companies going public, we have seen several highly anticipated IPOs not live up to expectations and burn through its working capital before being able to deliver on its promises," he said. "Investors need to look into the company's balance sheet and determine if it has enough capital to execute on its plan and to make sure its deploying capital to the right places and not on management's salaries."