U.S. or Canada? The Ongoing Cannabis Debate

U.S. or Canada? The Ongoing Cannabis Debate

Cannabis is the ultimate growth industry. There are no doubts about that.

As a sector, cannabis has the potential to claim $100’s of billions in global market share from several different industries. Yet because of nearly 100 years of absurd Prohibition, this is an industry that is (artificially) brand new – as a legal line of business.

We have never before witnessed anything like this in our economies. Even with alcohol Prohibition, alcohol is a product with one, single commercial application: as a recreational drug. Cannabis (including hemp) has hundreds of potential applications. And just one of those applications is as a far superior (and much safer) recreational drug than alcohol.

Canada and the United States are the first two nations out of the starting blocks as cannabis normalization gradually – but steadily – sweeps the globe. This has sparked an ongoing debate within the cannabis industry and among cannabis investors.

Where is the better cannabis opportunity today: the United States or Canada?

Sadly, most previous attempts to answer this question have been very one-sided. Someone within the cannabis industry (on one side of the Border) claims that their opportunity is much better/greater.

Typically, it’s someone attached to the U.S. cannabis industry, claiming that the American opportunity in this space is far better. Another such article just appeared on Barron’s.

Again, we have a very one-sided “analysis” by a U.S.-focused pundit, which concludes (surprise! surprise!) that “the U.S. is best”. The gist of the article is very familiar to what has been said before – and quite simplistic.

U.S. marijuana stock valuations (as a whole) are even more compressed than the extremely anemic current valuations for Canadian cannabis stocks. But the U.S. already has more revenues on the table.

Over the long term, the revenue gap will grow due to the much greater size of the American cannabis market. Therefore U.S. valuations should be much higher, relative to Canadian stocks.

If it were only that simple.

  • The United States has a completely fragmented regulatory landscape, with cannabis still totally illegal nationally. Canada has national legalization and a relatively homogenous regulatory landscape.
  • Because of the highly fragmented U.S. industry, there is very little transparency in the U.S. cannabis industry. Each state is completely unique in its regulatory and market parameters. It requires extensive due diligence just to become familiar with industry fundamentals on any one state market.
  • Because cannabis is illegal in the U.S. federally, there is still very little access to banking services for most of the cannabis industry. This not only causes day-to-day operational hurdles, it also stifles sector growth.

By themselves, these three factors can totally account for the gap in valuations between U.S.- and Canadian-based cannabis companies.

The fragmented market and fragmented regulatory structure in the U.S. means that even U.S. multi-state operators can generate only limited synergies as they expand. There is no interstate cannabis commerce currently allowed in the U.S.

Conversely, in Canada (for example) cannabis extraction specialists are able to service the industry with cannabis oils at a national level. This has allowed much greater scale in cannabis extraction for Canadian-based companies than is currently seen with publicly listed U.S. companies.

This fragmentation not only effects cannabis operators, it affects cannabis investors. Investing in U.S.-based companies is a much more laborious undertaking – unless the company operates in a single jurisdiction. To do proper due diligence means learning all of the individual fundamentals and regulatory structures for each market in which that company operates.

As The Seed Investor has pointed out frequently, there is no similarity at all between cannabis operations in Colorado versus cannabis operations in California – despite the fact that both are dual-use state markets. This not only makes it difficult to research individual companies, it makes it extremely difficult to compare publicly listed companies based in the U.S.

Colorado has the best regulatory structure for its cannabis industry. Not surprisingly, it has the strongest and most mature cannabis industry versus any other U.S. state (or Canadian province).

California is a train wreck. The state has done nothing right. It has created a regulatory nightmare for any cannabis companies lured into the state by the huge (potential) revenues on the table.

Colorado’s cannabis industry is continuing to grow.

California’s (legal) industry is so hamstrung by over-taxation and over-regulation that it is in danger of plateauing – already. The state government is so clueless and cowardly that rather than trying to fix its broken legal industry, it’s launched a new-and-futile War on Drugs on the state’s cannabis black market.

Then there is banking/financing. One only needs to look at the enormous amounts of capital raised by Canadian-based companies to see the magnitude of the difference here. Similarly, the friendly regulatory framework has already brought in large-scale investments by multinational corporations from outside the cannabis industry.

Big Alcohol and Big Tobacco have already established a growing presence in the Canadian cannabis industry. They aren’t even willing to touch U.S. cannabis – given its (illegal) federal status.

What all of the “U.S. is best” articles (conveniently) ignore is how the superior access to capital in Canada sets up Canadian-based companies to expand internationally.

This is already a substantial part of the operating strategy of most of Canada’s larger publicly listed companies. Even many smaller companies are already rolling out aggressive plans for international growth, because they can fund such activities.

Conversely, with U.S.-based companies, “expansion” means (exclusively) seeking to penetrate a new – but entirely different – state market. While the United States offers massive long-term potential for cannabis revenues, it’s still only a small portion of the global potential for cannabis.

Is the point of this article to tell cannabis investors that “Canada is best”? No.

As The Seed Investor has observed previously, astute cannabis investors need to position themselves in both of these cannabis markets. They need to invest in U.S.-based and Canadian-based companies. Not either/or.

Cannabis investors need exposure to the massive U.S. cannabis market. Eventually, it will be legalized nationally (likely sooner rather than later). Eventually, access to financial services will improve (likely sooner rather than later). Eventually, the regulatory structure will become more homogenous and transparent.

Cannabis investors need exposure to the Canadian cannabis industry. This is the world’s leading jurisdiction for legalizing-and-commercializing cannabis. This makes Canada the ideal base of operations from which to launch a global cannabis company.

U.S. cannabis valuations don’t have to rise to “catch up” to Canadian companies. Cannabis valuations in Canada don’t have to move down to match U.S. companies.

Rather, industry valuations in both jurisdictions are ridiculously low and equally depressed. Cannabis investors should be expecting strong performances from both their U.S. and Canadian marijuana stocks – for different but equally compelling reasons.

If cannabis stock valuations in the U.S. are currently “look cheaper” to some cannabis investors (or cannabis analysts), maybe this is because they simply haven’t been looking closely enough.
Published at Tue, 03 Sep 2019 17:48:06 +0000

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