Legal Marijuana's Pivot From Canada To US, Beyond Is Accelerating

After the global industry jolt in 2018 when Canada legalized the recreational and medical use of cannabis, licensed producers and investors are well into a pivot to the U.S. market and beyond for future growth.

That's the consensus of a panel Wednesday at the Benzinga Cannabis Capital Conference that underlined how the industry is shifting geographically, including penetration into Latin America and Europe.

'A Generational Investment Opportunity'

Canadian cannabis players failed last year to use their first-to-market profile and strong currency to dominate a U.S. market 10 times bigger than their own, said Alfred Avanessy, managing director of Cormark Securities.

"Now today, you have maybe two or three Canadian companies that have the financial capability to go down to the U.S. in a meaningful way," he told the Toronto conference. 

The result: American multistate operators continue to grow their U.S. market footprint, while the Canadians are forced to go farther out internationally as they acquire foreign assets inexpensively, Avanessy said. 

The American market is fast becoming a growth story, with the federal government talking about possible legalization of cannabis and companies accessing capital markets, he said. 

For investors, as fragmented U.S. state policies are possibly replaced with federally legalized cannabis use down the road, the market valuations put on American companies are expected to continue to climb.

As things stand in the U.S. market, regulations are highly restrictive and impede growth overall for the cannabis market, Avanessy said. 

So while the biggest revenue-producing cannabis companies are American, their valuations remain a fraction of those of their Canadian peers.

That’s expected to change as Americans move closer to possible legalization, he said. 

"It's fair to say that, as things rationalize in the United States, there probably is a generational investment opportunity." 

Kagia: American Valuations Rising 

John Kagia, executive vice president of New Frontier Data, predicts that Canadian valuations will continue coming down as American valuations climb.

"The Canadian LP (licensed producer) stocks peaked in January 2018. That's already 16 months ago," Kagia said. 

Since October 2018, when the American multistate operators started telling their stories to the capital markets, their valuations have risen by around 40 percent, he said. 

"The U.S. multiples are going to go up because, until the States Act passes, we still haven't seen fundamental investors come into this industry ... just wait until everyone who has capital feels comfortable about investing in the industry." 

For now, hemp is an immediate growth opportunity in the U.S. market after the 2018 Farm Bill allowed nationwide legal production, Kagia said. 

Two Views On Hemp 

Brent Johnson, managing attorney for the Hoban Law Group, said the hemp space is a novelty for investors looking for growth opportunities.

"People are just starting to look at hemp and gathering that data. In the U.S. market, marijuana remains illegal at the federal level. But hemp, especially with the 2018 Farm Bill, is wide open to full-blown commercial development," Johnson said.

Avanessy cautioned investors against jumping onto the hemp bandwagon before they do their homework.

He distinguished between industrial hemp, which will inevitably become commodified, and hemp brands that have the most appeal for investors, especially as pure-play hemp companies look to become takeover targets.

"A startup who is trying to latch onto the hot theme in the market today — you have to explain how you will create value in the chain. And that requires capital and distribution," Avanessy said. 

"Hemp is obviously what we talk about now, but when we look at it, we ask, 'how you will get your product on the shelf and maintain your moat and your leadership position?'" 

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Moderator Drake Sutton-Shearer, CEO of PROHBTD, and John Kagia, executive vice president at New Frontier Data, during a panel discussion Wednesday at the Benzinga Cannabis Capital Conference in Toronto. Photo by Juil Yoon.