Green Rush

by Geoff Poulton, ProjectM-Online (Allianz Global)

For five years, the 42-acre Hershey complex in Smiths Falls stood unused: a sprawling reminder of former glories, when the small Canadian town proudly declared itself the “chocolate capital of Ontario.” The US company shut down operations in 2008 to move production to Mexico. One of the region’s major employers, it was a bitter blow to Smiths Falls.

A different smell in the air

But in 2014, that all changed. Things are looking up again at 1 Hershey Drive. The lights are on, the car park well populated and much of the 46,500-square-meter factory space is in regular use. Instead of chocolate, however, the site is now home to one of the world’s largest marijuana producers: Canopy Growth Corporation. After initially renting a small part of the site, in January 2017 the Canadian company purchased the entire plot. “We’ve come a long way in just over three years,” says communications director Jordan Sinclair. “And we’re really only just getting started.”

The firm, which trades on the Toronto Stock Exchange as WEED, shot to prominence in late 2016 when it became the first cannabis producer to attain “unicorn” status as its valuation leapt past the $1 billion mark. That was in the wake of the November vote by several US states to legalize either medical or recreational marijuana consumption. The drug is now legal in more than half of US states, although it remains illegal on a federal level.

In Canada, medical marijuana has been federally legal since 2001, giving it perhaps the most established legal market in the world. “The rest of the world is keenly watching what we’re doing. In many ways we’re blazing a trail,” says Sinclair. This was reinforced in April, when Canada introduced a bill to nationally legalize recreational marijuana by 2018 – after Uruguay, only the second country ever to do so.

The only way is up

These are heady times for the cannabis industry, which, according to the website of San Francisco-based Arcview Market Research, “… Will never be smaller than today.” The cannabis research firm says the North American legal market recorded $6.7 billion in revenue in 2016, up 30% from the year before. It expects an approximate 25% annual compound growth rate through 2021.

“The only consumer industry categories I’ve seen reach $5 billion in annual spending and then post anything like 25% compound annual growth in the next five years are cable television in the 1990s and the broadband internet in the 2000s,” said Arcview editor Tom Adams in a statement.

It’s a pattern that many industry experts expect to be replicated beyond North America in the coming years. “Worldwide, approximately $150 billion was spent on marijuana in 2015, mostly illegally,” says Scott Greiper, founder of Viridian Capital Advisors, a Wall St. investment banking and advisory firm for the legal cannabis market. “This is a rare business: we know that there is major demand – it just has to be legalized,” he says.

The global picture is changing: in South America, for example, countries like Brazil, Mexico and Colombia are either creating legal markets or relaxing rules on possession. Germany, the Republic of Ireland and Australia have passed laws in recent months to allow medical use, while Israel is establishing itself as a global research hub, developing new strains and more refined ways of consumption, from edibles to sprays.

Highly speculative bunch

According to Greiper, the sector side has “exploded” recently. “In just a few years, we’ve gone from a handful to around 300 public companies in the market. And with good reason. In terms of gross margins, it’s the most profitable agricultural commodity in the world right now.” However, he is quick to sound a note of caution: “You hear the phrase ‘green rush’ thrown about and some people think it’s an easy way to make money, but there are a considerable number of risks.”

Chief among those is what he calls an “immaturity” on the operations side of some young growing businesses. “What’s more, in the US, most public cannabis companies trade their shares over the counter and don’t have to file audited financial reports with regulators.” In 2014, the Securities and Exchange Commission suspended five cannabis companies for fraud.

The stigma attached to marijuana also continues to deter larger investors, although the situation is changing. In 2016, Microsoft announced a partnership with a software start-up that helps growers, sellers and government agencies track marijuana from seed to sale to ensure legal compliance. Renowned venture capitalist Peter Thiel’s Founders Fund became the first institutional investor in the sector in 2015 when it took a stake in Leafly, an online cannabis information hub.

Look beyond the weed

For the more risk-averse, a diversity of opportunities present other options. “You don’t just have to look at companies that are touching or directly associated with the plant,” says Greiper. “Agricultural technology, such as lights and nutrients, are fundamental to the sector, as is real estate. Security, too: federal illegality in the United States means dispensaries operate on a cash basis because they can’t get a bank account.”

Outside North America, the options are currently limited, but Thomas Hohler, who runs German cannabis investment blog Marihuana Aktien (marijuana shares), expects things to change in the near future. “Canadian firms like Canopy Growth will likely continue to expand internationally, bringing existing expertise to partners in new markets. In Germany, the market is still in its infancy, but there’s a growing pioneering spirit. The country appears to be on its way to following in Canada’s footsteps.”

With global acceptance and widespread legalization seemingly only a matter of time, Scott Greiper says now is the time for potential investors to do their homework. “Once things change at federal level in certain key locations, valuations will skyrocket. Then it’s a whole different ball game.”

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