The marijuana industry is growing at an exceptional pace, and investors have had no choice but to take notice. Investment firm Cowen & Co. forecast in 2016 that the U.S. marijuana industry could be worth as much as $50 billion by 2026, while ArcView, a leading cannabis research company, has projected a 26% annual growth rate in North America through 2021. If ArcView is correct, the North American legal-weed industry could be generating almost $22 billion in sales within a few years.
But investing in marijuana is rife with challenges.
Caveat emptor when investing in pot stocks
To state the obvious, cannabis is wholly illegal at the federal level in the U.S., with the substance classified as Schedule I. This classification means that marijuana has no recognized medical benefits, and it has a high potential for abuse. Weed’s scheduling creates all sorts of red tape that medical researchers have to contend with to run studies, and it makes life quite difficult for pot businesses. Marijuana companies are often unable to access basic banking services, and they have virtually no way of taking normal corporate income-tax deduction as a result of tax code 280E.
Making matters even worse for U.S. pot companies, Attorney General Jeff Sessions announced earlier this month that he’d be rescinding the Cole memo, a loose set of rules aimed at states that had legalized cannabis in some capacity. For example, states had to ensure that cannabis grown within a state stayed there. If states abided by the Cole memo, then the federal government more or less promised to keep a hands-off approach. Sessions’ rescinding of this memo signals the possibility that state-level prosecutors will be able to go after marijuana businesses operating in “legal” states.
The deck is really stacked against success throughout much of the U.S. marijuana industry. But that’s not the case in Canada.
Canada has had marijuana investors seeing green
In Canada, medical cannabis has been legal since 2001, and the medical-weed industry is being overseen by Health Canada, the equivalent of the Department of Health and Human Services in the United States. As recently as May 2017, Health Canada noted that the number of eligible medical patients was increasing at a rate of 10% per month, singlehandedly pushing some pot stocks into the black.
The downside, though, is that most Canadian marijuana stocks have shot through the roof, and are potentially priced for perfection. A majority of cannabis stocks are still losing money on annual basis as a result of significant spending tied to capacity expansion. It’s good news that Canada is on track to legalize recreational pot by this July, and that could open the door for up to $5 billion in additional annual sales once fully ramped up. But there are still risks for investors of most Canadian pot stocks.
However, there is a relatively new player in the Canadian cannabis industry that just might be the smartest way to take advantage of the green rush. Ladies and gentlemen, say hello to Cannabis Wheaton Income Corp. (NASDAQOTH:CBWTF).
If Cannabis Wheaton Income has a somewhat familiar ring, it’s because the company was named and modeled after precious-metal streaming company Wheaton Precious Metals (NYSE:WPM), which is headquartered in Canada.
The idea behind a cannabis streaming company is simple and genius. Pot-based companies looking to expand their growing capacity or some other aspect of their operations, but without the adequate financing to do so, approach Cannabis Wheaton Income for that capital. In exchange for funding, Cannabis Wheaton Income receives a royalty percentage of that business. Just like Wheaton Precious Metals with its silver- and gold-streaming deals, there are no recurring costs and no daily maintenance expenditures to worry about as a streaming company. It’s merely about making deals and reaping high-margin returns by selling what you receive from the stream at current market prices.
According to the company, it has an internal rate of return of more than 60% on its deals. It’s able to achieve that through an estimated cost of goods sold per gram of $2.50 Canadian, or about $2.01 in U.S. dollars. Comparatively, the average selling price per gram of cannabis in Canada is CA$7.75 Canadian ($6.22). That works out to an EBITDA (earnings before interest, taxes, depreciation, and amortization) per gram sold of CA$5.25 ($4.21 U.S.).
Another major advantage of the streaming model is that it allows for both industry-based and geographic diversity. The company currently has 15 streaming partners and anticipates receiving about 230,000 kilograms of annual dried cannabis production as a result. That’s more than any of the rapidly expanding Canadian marijuana stocks that are expected to dominate the industry. Plus, with multiple provinces represented in its streaming portfolio, it’s able to minimize licensing and production-delay risks.
In an industry mired by question marks, Cannabis Wheaton Income might just be the smartest buy.
credit:fool.com
