High-Yield Stocks & Hot Industries
Investment Strategy for Canadian Cannabis Stocks in 2024
The Canadian cannabis industry has been quite a wild ride since legalization, and it looks like 2024 will be another crucial year. To successfully navigate this sector, traders and investors need a deep understanding of market dynamics and the ability to identify opportunities during periods of volatility. This guide delves into the world of Canadian weed stocks and provides valuable insights and analysis to assist you in making informed decisions.
This article will answer the following questions:
What is cannabis?
What are the main drivers of the future cannabis industry?
Issues facing the Canadian cannabis industry
Prominent Canadian cannabis stocks to keep an eye on
Potential investment opportunities and risks
Cannabis industry overview
As interest in pot stocks continues to rise, many new and experienced investors who lack intimate knowledge of the industry are considering investing in cannabis companies and stocks. However, like any new industry, learning about the intricacies of the diverse and rapidly-growing marijuana business can be overwhelming. In the following sections, we break down some of the most common and important terms that you're likely to encounter as you follow the cannabis market.
What is cannabis?
To begin with, the cannabis plant has three primary species: Cannabis sativa, Cannabis indica, and Cannabis ruderalis. Cannabis refers to the plant species Cannabis sativa, which contains hundreds of chemical substances, over 100 of which are known as cannabinoids, such as THC and CBD. Cannabinoids have effects on cell receptors in the brain and body.
Marijuana is a term used to describe the dried leaves, flowers, stems, and seeds of the cannabis plant, typically used for medicinal or recreational purposes. Marijuana is usually high in THC, the psychoactive compound that produces the "high" associated with cannabis use.
Hemp, on the other hand, is a term used to describe varieties of the cannabis plant that contain less than 0.3% THC by dry weight. Hemp is commonly grown for industrial purposes, such as making fibers, textiles, and building materials, as well as for food and supplements, such as hemp seeds and CBD oil.
Hemp is legal in many countries, while marijuana is illegal or restricted in most countries due to its high THC content.
The use of cannabis
Cannabis use encompasses using the plant in its dry form or when mixed or processed into another product, such as edibles or concentrates, including hashish, liquids, or other forms.
Cannabis use for non-medical purposes refers to using cannabis for a range of non-medical reasons, such as socially for enjoyment, pleasure, amusement, or for spiritual, lifestyle, and other non-medical reasons.
Cannabis use for medical purposes refers to using cannabis to treat a disease or disorder or to alleviate symptoms.
It is worth noting that in Canada, industrial hemp has a relatively small market share compared to medical and recreational cannabis.
The supply chain of the cannabis industry
Since the legalization of recreational cannabis in October 2018, the Canadian cannabis industry has experienced rapid growth. As the industry expands, it becomes increasingly important to understand the complexities of the cannabis supply chain.
The Canadian cannabis supply chain consists of three stages:
Cultivation and production: Licensed producers (LPs) are responsible for growing cannabis plants. Once the cannabis plants are mature, they are harvested, dried, and processed.
Distribution and wholesale: Licensed distributors ensure that products are appropriately packaged, labeled, and transported in accordance with regulations. The distribution process involves storage, transportation, and inventory management. Wholesalers purchase products in bulk from LPs and sell them to retail stores.
Retail and consumer experience: Retail stores provide a wide range of cannabis products to meet consumer preferences and demands. Both physical and online retail stores are responsible for selling cannabis to consumers in a regulated and controlled manner.
What are the main drivers of the future cannabis industry?
1. The gradual reduction of illegal cannabis.
New research based on data from the Canadian government has revealed that while legalization has led to an increase in cannabis use, the legal market is increasingly replacing the illicit cannabis market in the country.
According to recently published data in the International Journal of Drug Policy (Volume 127, May 2024), the percentage of Canadians purchasing cannabis from legal sources increased from 37% in 2019 to 69% in 2022. These figures suggest that consumers are becoming more comfortable and reliant on licensed retailers.
Furthermore, continued rollouts of legal cannabis stores in certain parts of Canada could help to further decrease the use of illegal cannabis. For instance, the province of Quebec still has relatively low penetration of legal cannabis stores.
2. The legalization process is the main driving force in the cannabis industry
Liberal government regulations and the legalization of cannabis for medical and recreational use in the US and Canada are driving demand growth in North America. Other countries are also beginning to follow in the footsteps of the US and Canada.
With increasing decriminalization, commercially regulated cannabis products such as beverages, edibles, and vapes are now making their way into consumer markets.
As a result, the cannabis market's growth trajectory is expected to continue in both the near and long-term. ACE equity research forecasts that the global legal cannabis industry (including medical and recreational use) will grow at a CAGR of 19.65%, reaching $75 billion by 2027, up from a market consensus of $18 billion in 2019.
Issues facing the Canadian cannabis industry
Slowing sales: Canadian recreational cannabis sales were valued at 5.07 billion CAD in 2023, up 12.2% from 2022. In 2022, annual marijuana sales increased by 17.9% compared to 2021. However, the year-over-year growth rate is slowing as the market matures, with 2022 sales up 17.9% from 2021. Poulos of Toronto Metropolitan University predicts a 10% growth for 2024 compared to 2023.
Illegal cannabis: The prevalence of the illicit cannabis market remains an ongoing challenge for the legal industry, despite legalization. High taxes, limited product availability, and price discrepancies contribute to the persistence of the illegal market, which still controls roughly 40% of cannabis sales in Canada as of 2024.
Oversaturation: The number of canceled or not renewed cannabis retail licenses in Alberta in 2023 exceeded the number of new store licenses issued. This marked the first time this has happened in the province since marijuana was legalized in 2018. Chair of the Cannabis Law Group at Torkin Manes in Toronto says that until cancellation numbers drop further, it's a sign of oversaturation in the market.
Canadian cannabis stocks strategy in 2024
Cannabis stocks, often referred to as weed stocks, represent companies involved in the legal cannabis industry. Canada’s historic move to legalize marijuana in 2018 marked a turning point for the cannabis industry.
This decision opened the doors for companies to operate legally, leading to the emergence of numerous cannabis stocks on the Toronto Stock Exchange (TSX) and NASDAQ. It offers a diverse range of investment opportunities, from ETFs and dividend stocks to growth-oriented firms.
Prominent Canadian cannabis stocks to keep an eye on
From the perspective of market capitalization and attention, we will focus on introducing the following cannabis companies:
Canopy Growth (TSX: WEED)
Canopy Growth Corporation, formerly Tweed Marijuana Inc., is a cannabis company based in Smiths Falls, Ontario. Canopy is touted as Canada’s first unicorn in the pot market. While the company sells its products under various brand names, the brand "Tweed" has the most recognition, thanks to its affiliation with rapper Snoop Dogg. The company began trading on the New York Stock Exchange (NYSE) on May 24, 2018.
Canopy Growth thumped the broader markets with a rise of over 160% in March 2024, valuing the company at 1.03 billion CAD by market cap. However, in fiscal Q3 2024 (ended in December), Canopy Growth reported a cash balance of just $188 million. It’s evident that the marijuana heavyweight has to lower costs to reduce its cash burn rate while inching closer to profitability.
Tilray Brands Inc（TSE: TLRY）
Tilray is a Canadian producer that cultivates and sells medical and recreational cannabis. In 2021, legacy Aphria acquired legacy Tilray in a reverse merger and renamed itself Tilray. The bulk of its sales are in Canada and in the international medical cannabis export market. U.S. exposure consists of CBD products and alcohol. Its medicinal marijuana segment is positioned in a smattering of E.U. countries, and it also aspires to sell recreational cannabis where and when it is legal to do so.
In total, it brought in $194 million in revenue in Q2 of its 2024 fiscal year, 34% more than a year prior. The trouble is that its extensive global footprint entails heavy investment and high overhead costs, both of which have yet to pay off. It isn't a profitable company, and its quarterly operating margin has been in the red for almost every quarter of the last five years. Until that changes, it'll be relying on debt financing and issuing new stock to keep the lights on, so shareholders will effectively be on the hook, and their value will probably continue to get diluted. As date of April 1st 2024, Tilray Brands is ranked among the top 25 undervalued stocks listed on the Toronto Stock Exchange.
Cronos Group Inc（TSE: CRON）
Cronos Group is in the business of investing in pot growers and companies in the marijuana business. It produces its own cannabis products and also invests in other cannabis companies. The company's portfolio currently includes diverse brands such as PEACE NATURALS, a global health and wellness company, British Columbia-based cannabis producer COVE, and hemp-derived CBD producer Lord Jones.
Potential investment opportunities
Unique advantage: Many of the major players in the cannabis industry are based in Canada, but there are also US-based companies with significant market capitalization. Outside of North America, there are no major players in this industry, as other countries where marijuana has been legalized often import marijuana from North American companies instead of producing it domestically.
High margins of leading companies: Since the legal marijuana industry is still relatively young, most marijuana companies do not have a long history of revenues or earnings. However, those companies with the highest sales base and the largest production capacity are likely to have the greatest chance of generating above-average margins in the future. This is due to economics of scale, operating leverage, and the fact that those with the most experience are likely the best at reducing production costs.
Market expansion: Key players in this market include corporations like Aurora Cannabis (ACB) and smaller, niche firms, all operating within the broader sectors of healthcare and consumer goods. The landscape is not just confined to Canada; companies are expanding their reach to countries like Germany and Australia, navigating different regulatory environments and tapping into new markets.
Investors who are bullish on the cannabis industry as a whole and prefer not to invest in individual companies can choose from several ETFs. It's also helpful to explore related sectors, such as tobacco stocks. Canadian tobacco stocks offer a different investment profile, often characterized by greater stability and a long-standing market presence. Incorporating these stocks into a diversified portfolio can be a strategic addition, helping to balance out the high volatility of cannabis stocks.
Investment risk
At first, there was a surge in cannabis stocks driven by high investor expectations and speculation. In the 12 months leading up to legalization, the value of publicly listed Canadian cannabis companies skyrocketed by 600% to over $40 billion CAD. However, the reality of regulatory challenges, oversupply issues, and profitability concerns soon set in, leading to volatility and corrections in the market.
Regulatory impact: While the global peer market is projected to be worth $685 billion by 2025, it is still relatively small compared to the global tobacco market, which is worth about $700 billion annually and has a low-single-digit growth rate. This suggests that there is a lot of potential for growth in the marijuana market. However, investors should also consider that beer and tobacco are legal in more markets around the world compared to marijuana, which is still restricted in many parts of the world. This could affect the growth potential and profitability of the industry in the long run.
Low profit margins: Investors should remember Benjamin Graham's statement that growth prospects in a business do not necessarily translate into profits for investors. High-profit margins in the marijuana industry may not be sustainable due to low market entry barriers and historically low margins in the agricultural industry (Half of all agricultural businesses generate operating profit margins less than 5%). Despite the legalization of marijuana in more countries and states, many cannabis stocks have underperformed due to slim profit margins and high valuations. Due to possible margin pressures for the industry, it is also not guaranteed that they will become profitable. Additionally, investors should not expect meaningful dividend yields from these stocks.
High volatility: Canadian marijuana stocks are strongly influenced by the country's progressive stance on cannabis legalization, and changes in regulatory policies can significantly impact their performance. It's crucial for investors to understand that these stocks are highly volatile and can be influenced by regulatory changes, market sentiment, and company-specific news. It's important to examine the diversity of these companies' operations, from cultivation in Ontario to retail in Smiths Falls, and to consider how global economic factors, such as oil and natural gas prices, might indirectly affect the sector.
