Marijuana may be illegal at the federal level, but that hasn’t slowed growth of the drug one iota within the U.S. or North America. In June, Mexico fully legalized medical cannabis, and right now Canada is debating legislation that would legalize recreational marijuana by the summer of 2018. This expansion comes on top of continued growth in the U.S. market, which now has 29 medical cannabis-legal states, and eight that allow adult-use sales.
According to ArcView, one of the leading cannabis research firms, legal weed sales soared in North America by 34% last year, and they’re slated to grow by an average of 26% annually through 2021. That type of growth is certainly enough to attract investors to marijuana stocks, which have risen as a group by more than 100% over the trailing year.
Cash is king when it comes to green
With the marijuana industry growing so rapidly, cash has become an increasingly important commodity for pot companies. Of course, obtaining cash isn’t always easy. Since financial institutions report to the Federal Deposit Insurance Corporation (FDIC), a federally created entity, and cannabis is illegal at the federal level, they often fear being prosecuted or fined for offering basic banking services to marijuana-based businesses. This leaves weed companies to deal with cash in many instances.
Considering that cash is king in the weed industry, here are five marijuana stocks that are overflowing with it.
Canadian medical cannabis producers and retailers
It probably won’t come as surprise that the purest-play marijuana stocks from Canada’s medical-cannabis industry are among the most cash-rich companies in the industry. Based on their most recent quarterly filings, here are the total cash and cash equivalent positions for four of Canada’s biggest medical pot players:
- Canopy Growth Corp. (NASDAQOTH:TWMJF): $83.8 million.
- Aphria (NASDAQOTH:APHQF): $137.6 million.
- Aurora Cannabis (NASDAQOTH:ACBFF): $91.4 million.
- MedReleaf (NASDAQOTH:MEDFF): $77 million (following its public offering, as of June 7, 2017).
The reason these companies are so cash-rich is that they’re looking to expand as quickly as possible. According to data from Health Canada in May, the number of eligible medical patients in Canada has increased by about 10% per month.
What’s more, as noted, the Canadian government is currently debating legislation introduced by Prime Minister Justin Trudeau that would legalize recreational weed by July 1, 2018. Canada’s parliament has estimated that legalizing adult-use pot would result in $5 billion to $7 billion in additional revenue each year for the Canadian marijuana industry.
Furthermore, a handful of Canada’s growers, such as Canopy Growth and Aphria, have been given the green light to export some of their dried cannabis production to foreign markets where medical cannabis has been legalized. A good example is Germany, which recently legalized medical marijuana but has virtually no domestic production to speak of. This export opportunity is also fueling expansion activity.
What’s coming down the pipeline in terms of expansion, you wonder? Unlike the other three companies listed, Canopy Growth is primarily using acquisitions to fuel its growth. The purchase of Mettrum Health earlier this year should allow it to reach more medical-cannabis patients. It also made a major land purchase surrounding its corporate headquarters to boost production capacity.
The remaining Canadian producers have predominantly chosen to grow organically. Aphria’s phase 4 expansion could boost its grow capacity to 1 million square feet once complete. Meanwhile, Aurora Cannabis’ 800,000-square-foot Aurora Sky facility may be the most technology-advanced and automated once completed. Lastly, MedReleaf is using its initial public offering cash windfall to boost capacity at its Bradford facility in Ontario.
The kingpin of cannabinoid-based drug developers
But when we’re talking about the cash cows of marijuana, none has more on its balance sheet than cannabinoid-based drug developer GW Pharmaceuticals(NASDAQ:GWPH). According to the company’s third-quarter report, it had $374.8 million in cash on its balance sheet as of June 30, 2017.
Why so much cash? First, GW Pharmaceuticals is preparing for what it expects could be a costly but lucrative launch of experimental drug Epidiolex, an oral cannabidiol-based medicine designed to treat two rare types of childhood-onset epilepsy — Dravet syndrome and Lennox-Gastaut syndrome. In two late-stage studies for each indication, Epidiolex met its primary endpoint, which was a statistically significant reduction in seizure frequency relative to the placebo. Assuming Epidiolex gets the green light from the Food and Drug Administration, we could be talking about a therapy capable of between $500 million and $1 billion in peak annual sales. Marketing expenses associated with Epidiolex should prove to be money well spent.
The other reason for the cash hoard is GW Pharmaceuticals needs capital to run studies for its other pipeline products. Remember, even if Epidiolex is approved, it could take a few years before the company is generating enough in quarterly sales to become cash flow positive. In the interim, it’ll be burning through its remaining cash on hand. Thus, having a lot of capital is critical for cannabinoid-based drug developers.
The two downsides you need to be aware of
While cash is king among marijuana stocks, investors also need to be aware that this cash isn’t just being plucked out of trees. In many instances, the way pot stocks accomplish capital raises is through secondary or bought-deal offerings. In a bought-deal offering, which is particularly common in Canada, an investment firm or institution agrees to buy an entire share offering from a client.
That these companies have been able to raise as much capital as they have signifies that there’s a lot of investor interest in the marijuana industry. However, it needs to be pointed out that these secondary offerings and bought-deal financings are pushing up the outstanding share counts of these stocks and potentially diluting existing shareholders. There’s no doubt that this capital is very much needed if these pot companies hope to remain competitive, but it’s likely to be a near-term hindrance to investors.
While we’re on the subject, also keep in the forefront of your mind that recreational marijuana is still illegal throughout all of North America. Despite all the projections of growth, nothing matters unless Canada, Mexico, or the U.S. alters its broader stance on cannabis. Canada seems to be the likeliest of the three to make that happen, making the four Canadian cannabis giants a potentially intriguing play. Nevertheless, without a bill being signed into law, pot stocks remain a very risky investment, huge cash balances or not.
credit:fool.com
