Investing in marijuana companies is like buying weed from that sketchy dude behind the 7-11…
He’ll tell you that you’re about to smoke the best reefer in your life. He’ll tell you he’s got the best prices in town. And he’ll even give it a fancy name like “trainwreck” or “triple diesel”.
But once you give him your money, you excitedly scurry home only to open a pitiful bag of seeds and stems.
In other words, you got burned.
Marijuana stock investing can be strikingly similar.
You see, there are so many companies attempting to cash in on the legal marijuana craze that the market has become crowded with half-baked start-ups and scamming stock pumpers simply looking to cash in on the excitement of an industry that has been predicted to grow faster than smartphones.
At the moment, it is still going through some serious growing pains, which you can clearly see in a slew of marijuana-focused companies that IPO’d over the past year or two:
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MedBox (MDBX) dived from $98 all the way down to $0.16.
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CannaVest (CANV) slid from $147 to $1.20.
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Medical Marijuana Inc (MJNA) dropped from $0.58 down to $0.06.
Now, while you could have banked some serious gains if you timed these positions perfectly, in the end the performance of these stocks were nothing but smoke and mirrors. But it appears as if the time has finally come to weed out the champs from the burnouts.
There was huge news this week that will be a total game changer for the entire industry…
A New King Has Been Crowned
It was announced last week that two major players in the medical marijuana space have joined forces: Tweed Marijuana Inc. (TWD.V) and Bedrocan Cannabis Corp. (BED.V) have agreed to merge, which marks the first major merger and acquisition in the nascent market.
The market clearly liked it, as shares of Tweed were up 15% and Bedrocan jumped 27% after the merger was announced.
One analyst called it a “white whale deal”.
Tweed is a consumer-driven marijuana company that famously operates at the old Hershey Chocolate factory in Smith Falls, Ontario. It was the first publicly-traded cannabis company in Canada.
Bedrocan is focused more on the medical side of things. It has developed strains of medical marijuana for patients with chronic pain, fibromyalgia, multiple sclerosis, arthritis, epilepsy, anxiety and depression, Crohn’s disease, and multiple other medical conditions.
Bedrocan has over 15 years of research experience, starting in the Netherlands. They are considered to be the foremost experts when it comes to developing research-based marijuana strains.
It’s a perfect partnership in the sense that Bedrocan has a ton of experience growing medical-grade marijuana, while Tweed has a very slick set of consumer brands and more capital market experience. Together they present a very formidable company that has already set itself up to be the undisputed leader in the medical marijuana sector.
When the deal is official, the merged companies will sport a market cap three times the size of the next-largest competitors. They’ll also have a licensed sales capacity of 6,000 kilograms of medical marijuana every year.
More importantly, they will represent about 25% of all registered patients in Canada — which is the key to making money in the space. You need regular customers, and this merger will pool the resources of both companies. Health Canada only allows patients to get a license for one provider at a time, so the merger will make the new company more attractive to customers who want more choice. A license for Tweed will essentially give you access to two robust product lines.
It will set the company apart when it comes to providing products to the growing number of patients in Canada. Health Canada has projected that the number of medical marijuana patients in Canada will more than quadruple by 2024 to around 450,000. If you go by the average revenue per patient of $3,750, that would make it a $1.7 billion industry.
But while Canada is a huge market on its own, Tweed is already looking to expand into others…
The Elephant in the Green Room
The newly formed company will be looking to expand into foreign export markets like Brazil and Chile, where medical marijuana is already legal at the federal level. That could certainly open up plenty of new revenue streams…
But it will pale in comparison to the elephant in the room: the United States.
Here in the U.S., the widespread legalization of marijuana is already off to a booming start. Twenty-three states and Washington D.C. have legalized medical marijuana. But Colorado, Oregon, and Washington allow the sale of recreational marijuana. And it’s been very, very popular.
Just take look at last year’s U.S. cannabis sales…
And that $2.7 billion was made while marijuana use, sale, and possession are still illegal on the federal level. Just imagine how much money will be rolling in once the rest of the country finally loosens its outdated laws. And loosen up it will…
For one, U.S. citizens are getting behind legalization efforts now more than in any other time in history. Recent polls in Michigan, Arizona, and California all showed that the majority of people wanted marijuana outright legalized.
It is also becoming more politically expedient as well.
The tax revenue for money-starved states will simply be too big to ignore. With so many states facing budget deficits, it shouldn’t take much to convince voters to open their doors to marijuana — especially if they can make the case against raising taxes — or as some states have done with other “vice” taxes like cigarettes and casinos, vow to put the money towards health care or education.
Just look at the tax revenue that Colorado has already raked in:
Colorado breaks that money up into three parts:
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10% goes to the local governments that gave grass a green light ($655,390)
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The 15% excise tax on production flows into building public schools throughout the state ($3,103,286)
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The rest is appropriated to the State Government General Purpose Fund ($5,819,490)
I think if you put it up for a vote, “taxing the high” will soundly beat higher taxes…
In the end, marijuana is going to be legal. And somebody has to supply all of that grass. The ones that do — like Tweed — will have millions of customers lining up to buy it.
If you’d like to learn more about the industry, I’d like to invite you to join me for the Cannabis Investing Symposium in San Fransisco next month. I’m on a panel with some very big names in the cannabis investing industry.
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Michael Berger, President and Founder of Technical420, a sell-side research firm focused specifically on the cannabis sector.
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Scott Greiper, President and Founding Partner of Viridian Capital & Research — the first investment banking/strategic advisory firm dedicated to building and financing emerging growth companies in the legal cannabis industry.
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Matt McCall, Founder and President of Penn Financial Group, LLC, an investment advisory firm.
We’ll be separating the facts from the hype and bringing you an honest look at a sector full of smoke and mirrors.
You can join us for free, you just need to register here.
