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Twenty Things You Want to Know – The Motley Fool



After years of promises by Prime Minister Justin Trudeau and months of debate in the Canadian Parliament, our neighbor in the north legalizes recreational marijuana for adults from today, October 17, 2018. The passing of the Cannabis Law in June 19, 2018, and the waving of the proverbial green flag today, ends about nine decades of the ban on adult use.

What exactly does that mean on a larger image scale, as well as for marijuana investors? Let's take a closer look at the 20 things you want to know about today's historical event.

  Dried cannabis buds next to a piece of paper that says yes, lying on dozens of Canadian miniature flags.

Getty Images.

. 1
Legalization varies by province

Although the Cannabis Act (Law C-45) legalises cannabis for adults across Canada, the country's provinces are free to change the rules and regulations as they see fit. This could mean that the statutory working age is raised to 19 or kept at 18, as in Alberta and Quebec. The provinces also have the last word on where consumers can buy marijuana (ie private or state-run pharmacies and online) and if they can grow it in their homes.

. 2 Foreign markets should generate the majority of long-term revenues

Certainly, the legalization of marijuana in Canada is historic, because it is the first time that an industrialized country gives green grass for the recreational grass. But do not expect the single market to be the long-term breadwinner in the industry. According to Health Canada, domestic demand is expected to reach only about 1 million kilograms per year. By comparison, foreign markets where medical grass is legal could devour more than twice that amount every year, making it much more important to Canadian pot stocks.

. 3 Not all types of consumption are legalized

Remember that just because marijuana is legalized, it does not mean that all forms of consumption take place on pharmacy shelves. The Cannabis Act states that from now on only dried marijuana flowers and cannabis oils can be sold with alternative products such as edibles, vapes, concentrates and cannabis-soaked beverages that are not yet approved for sale.

  Cannabis close up concentrate.

Source: Getty Images.

. 4 It is unclear when many alternative products will get the green light.

Industry experts and the marijuana corporations themselves expect these aforementioned alternative pot products to be offered for sale by Health Canada in 2019. However, there is no concrete timetable for Parliament. I will discuss extending the scope for consumption, which means that at this point it is more puzzling than anything else.

. 5 Alternative Cannabis Products Will Provide Differentiation

Why so much attention for alternative cannabis products? Quite simply, they are typically a product with much higher margins than dried flowers, and they are exposed to much less long-term price pressure. These alternatives, including oils, vapes and infused drinks, will also be critical in helping marijuana stocks stand out from the competition. A perfect example is Aphria (NASDAQOTH: APHQF) Construction of a cannabis extraction plant capable of producing 25,000 kilograms of equivalent concentrate production per year.

. 6 Excise duties are exceptionally low in relation to alcohol

Canada is struggling to achieve illegal marijuana sales through an exceptionally low excise tax on legal grass sales. This excise tax is approximately 10%, which is significantly lower than the excise duty charged in Canada of between 50% and 80% on beer, wine and spirits.

  A suspicious young man in a blue hoodie holding a pot of cannabis plant.

Source: Getty Images.

. 7 The black market is not going away

But even a relatively low excise tax will not be enough to drive the black market out of Canada, at least initially. Illegal cannabis players do not have to pay excise, federal income or fees for growing and selling licenses. There are probably lower overheads for illegal players. This allows the black market to easily undercut the legal-channel pricing, which could become a bigger problem than investors and top companies realize.

. 8 Marijuana sales are on the rise

Despite ongoing black market threats, sales of marijuana weed killers are in vogue. Industry giants like Canopy Growth Corp. (NYSE: CGC) and Aurora Cannabis (NASDAQOTH: ACBFF) are expected to increase their sales by 355% each 639% this fiscal year, and 157% and 119 % next year.

. 9 However, production is far from being fully utilized

In order for investors to expect as much revenue as possible in the coming quarters, they should also understand that production capacity is far from peaking. Aurora Cannabis is targeting an annual capacity of 100,000 kilograms by the end of 2018, but expects to produce more than 570,000 kilograms at full throttle. Aurora, like Canopy Growth, Aphria and all the other marijuana blocks out there, will have to wait a long time for the yield to be close to optimal.

  Several jars of dried cannabis standing on a counter.

Source: Getty Images

10. Oversupply remains a long-term problem

But with production peaking for much of marijuana stocks, industry may be seriously concerned about oversupply. Based on current forecasts, Canadian companies assume that annual production, for example, will easily exceed 3 million kilograms in 2020 or 2021, which means foreign markets will have to buy quite a bit of pot. If marijuana stocks are struggling to delay this overcapacity, this could be a recipe for a marked drop in prices of dried flowers per gram.

. 11 A handful of marijuana stocks could control more than half of the market

Interestingly, cannabis producers, if they are on the rise, could control only a handful of breeders in more than half of the market. Based on my own rough calculations, Aurora Cannabis (after completing the ICC Labs acquisition) will exceed 600,000 kilograms, with Canopy Growth and Aphria striking their own weight at around 500,000 kilograms and 255,000 kilograms. Add in Tilray and The Green Organic Dutchman and these five pot stocks could together produce 1.8 million kilograms by 2020 or 2021.

12th All Canadian pot profits should be marked with an asterisk here.

Do marijuana stocks in the profit column have a green point? Well, take off your blinders. Despite a handful of pot stocks that have produced encouraging gains so far, these returns are in effect the result of Canada's (legal) accounting (International Financial Reporting Standards). In simple terms, Canadian reporting pot companies are able to adjust the rating of their cannabis plants at any time, which results in many reporting a profit, with a fairly big star.

  A tilted glass of dried cannabis lies on a small pile of cash.

Source: Getty Images.

. 13 Most Stock Shares Are Well Capitalized

While their profits at this point can be nothing more than a record of smoke and mirrors, marijuana companies do not lie when they praise their cash-rich balance sheets. Given the need to rapidly expand their growth capacity, build their international infrastructure and develop their brands, the equity shares have not been shy away from capital increases. When beer maker Corona and Modelo Constellation Brands (NYSE: STZ) closes its $ 3.8 billion stake in Canopy Growth, Canopy will have more than $ 4 billion in cash available ,

fourteenth Non-dilutive funding options are now available to the top firms

Until the cannabis law passed on June 19, publicly traded Canadian marijuana stocks had virtually only one option to raise capital: purchased bids. These offerings involve the sale of ordinary shares, convertible bonds, stock options and / or warrants to an investor or group of investors to raise capital. Of course, cannabis companies now have legal, non-dilutive options including marijuana bank loans and lines of credit.

15th Stock-based Dilution is a Perennial Issue

Although purchased deals were necessary to drive expansion in the marijuana industry, they will also have a negative long-term effect on pot stocks (and investors). By selling shares, debts that can be converted into shares, and options or warrants that can be exchanged into shares, pot companies have inflated their outstanding stock payments. Aurora Cannabis, for example, could soon surpass 1 billion outstanding shares, having just 16.2 million shares just over four years ago. These additional stocks not only dilute existing investors, but make it harder for a Cannabis share to generate significant earnings per share.

  Two businessmen in suits shaking hands as if in agreement.

Getty Images.

sixteenth Expect the Negotiations to Continue

The growth in the cannabis industry is undeniable, meaning that companies outside the top industry are taking notice of it. As mentioned earlier, Constellation Brands has a massive stake in Canopy Growth, which gives the company a 38% stake. Constellation and Canopy will work together on alternative cannabis products, using Constellation's superior sales and marketing capabilities to extend the reach of Canopy (where grass is natural, of course). Expect that such deals will continue, albeit perhaps not on this scale.

17th Do not Forget Outsides

Investors are so focused on companies that are in direct contact with the cannabis plant that they have almost forgotten that the relief organizations are working behind the scenes to support this industry. Think of companies like KushCo Holdings (NASDAQOTH: KSHB) that supply packaging, branding and marketing solutions to pot companies worldwide to comply with local laws. KushCo also supplies hydrocarbon gases and solvents used in the manufacture of cannabis oils and concentrates. These sub-stocks have the potential to generate even greater profits than growers.

18th There Is Life Outside Canada

It is worth pointing out that while all investors focus on Canada, there is a world of cannabis beyond the Canadian border. In the South, 30 US states have legalized cannabis since 1996. In fact, California's recreational marijuana industry can generate more annual sales than across Canada . In other words, although Canada is a marijuana outsider, there are many other opportunities out there.

  A frustrated investor grips the tip of his head as he looks at losses on his computer screen: Getty Images. </p>
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<h2><strong>  19th Volatility is a lifestyle </strong></h2>
<p>  If you plan to invest in marijuana stocks, you should expect a bumpy ride. Of course there will be winners. But it also means that there could be pot stocks that go completely to their knees. Since the legalization of leisure activities has little priority, few investors know how to approach these stocks, leading to high volatility. Take Tilray, who shot up $ 300 a barrel for $ 300 per barrel within four weeks and promptly returned two-thirds of its value in the next three days </p>
<h2><strong>  20. History says marijuana stocks are in a bubble </strong></h2>
<p>  Last, but not least, the thing no investor wants to hear: marijuana stocks are almost certainly in a bubble, and it can not end well. There was no "next big thing" investment in the last quarter century that recovered like marijuana stocks and kept their profits in the long run. The internet, business-to-business commerce, genomics, 3D printing and blockchain have all seen their bubbles burst. Chances are good that marijuana stocks will suffer a similar fate. </p>
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