Ever since the legalization of cannabis for recreational and licensed medical use in Canada last October, the hype of “buying on mystery” has waned, following a brief period of volatility among marijuana stocks. There is now a higher degree of certainty as to where the sector is heading. Investors are beginning to focus on investing in more established companies which have the potential to ride the forecasted wave of growth in the sector.
In fact, “valuations are realigning with fundamentals as investors become more interested in actual operating businesses with real customers, brands and access to markets,” says Elliot Johnson, Chief Investment Officer at Evolve ETFs and Portfolio Manager for the Evolve Marijuana ETF (TSX: SEED).
As the sector begins to mature, it is experiencing a spate of M&A and other corporate transactions as more established companies strive to build economies of scale and gain access to product supply.
For instance, since legalization was officially announced in July 2018, among the transactions that have taken place are:
- Constellation Brands Inc., the parent company of Corona beer and other alcoholic drinks, make a $4 billion investment in Canopy Growth Corp;
- U.S. cigarette maker Altria investing $2.4 billion in Cronos Group;
- Aurora Cannabis Inc. acquiring CanniMed Therapeutcs Inc. and MedReleaf Corp. in all Canadian transaction;
- Molson Coors Canada partnering with The HEXO Corp. to produce and distribute non-alcoholic, cannabis-infused beverages; and
- Aurora Cannabis Inc. announcing that it will buy closely held Whistler Medical Marijuana Corp., one of Canada’s original 10 licensed producers.
- HEXO Corp. announced plans to acquire Newstrike Brands Ltd. in an all-share transaction valued at $263 million.
More Regulations to Come in the Canadian Cannabis Industry
Although the industry is starting to mature, and recreational and medical cannabis are currently legal in Canada, the evolving regulatory environment will have a bearing on the success of some cannabis companies.
For instance, while the rules around retail distribution are becoming clearer at the provincial level, the illegal market still dominates the retail trade – which means that greater controls are necessary; as well as the establishment of more retail outlets in Provinces like Ontario.
Incidentally, lower prices for marijuana on the black market is the primary reason for higher sales through the retail channel. According to StatsCan, the average all-in market price paid for legal cannabis flower was $9.70 per gram in the fourth quarter of 2018, compared to an average price of $6.51 per gram on the illegal market. Part of the reason for higher prices on the legal market is due to government taxation.
In addition, The Federal government announced last year that it will be introducing regulations surrounding the manufacture and sale of edible products infused with cannabis. These regulations are expected in the fourth quarter of this year, although pending Federal elections in October could delay any action on the issue. The implementation of the regulations could have a direct impact on the Molson Coors Canada-The HEXO Corp. and the Altria-Cronos Group transactions.
Concurrent with developments in the Canadian market, several countries are taking Canada’s lead in legalizing cannabis consumption. This development will give established Canadian cannabis companies a competitive advantage in participating in the global growth of the industry.
As the cannabis industry goes through its early stages of growth, it is prudent to consider investing in actively managed marijuana ETFs, like the Evolve Marijuana ETF (S&P/TSX: SEED), which uses a diligent risk management process to select marijuana stocks with the best growth potential.
With a return of 48.5% over the 12-month period ending February 28, 2019, net of fees, SEED is the top performing equity ETF out of 504 equity ETFs listed on the S&P/TSX*. Its performance during the same period is more than double that of the North American Marijuana Index which returned 22.6%.
*As ranked by the Bloomberg Canadian TSX-listed equity category, as at February 28, 2019.
For more information about participating in the growth potential of the Evolve Marijuana ETF (TSX: SEED), please contact your financial advisor or visit our website.
1 The rates of return shown in the table are used only to illustrate the effect of the compound growth rate and are not intended to reflect future values of the ETF or returns on investment in the ETF. Total return performance calculations reflect performance from February 28, 2018 to February 28, 2019 on a trailing basis and are subject to change daily.
2 Since inception of SEED on February 12, 2018
Commissions, management fees, expenses and applicable sales taxes all may be associated with an investment in the exchange traded funds managed by Evolve Funds Group Inc. (the “ETFs”). The indicated rates of return are the historical annual compounded total returns including changes in per unit value and reinvestment of all dividends or distributions and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any securityholder that would have reduced returns. ETFs are not guaranteed, their values change frequently and past performance may not be repeated. The prospectus contains important detailed information about the ETFs. Please read the prospectus before investing.
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