Cannabis investment to grow both in US and Canada this year

With Canada legalizing recreational marijuana last October the year 2018 saw a lot of investment in cannabis related companies in Canada. However, U.S. companies and investors are now working to gain a slice of the profits.

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Investor interest could shift to the U.S. market this year

However, U.S. investment in cannabis related areas will not only pick up in Canada but in the U.S. as well. According to the Financial Post recreational marijuana is already legal in 10 states as well as Washington DC but is still banned at the federal level. Medical marijuana is legal in 33 states.

The market has expanded dramatically as well as hemp can now be legally grown in the U.S. as reported in a recent Digital Journal article.

Alfred Avanessy of Cormark Securities which has cannabis as its biggest source of business in Canada said: “Investors’ imagination is being captured more by what’s possible in the U.S. The U.S. is a couple years behind us from a regulatory perspective and it’s also by definition 10 times larger than we are.”

U.S. consumer spending on legal cannabis is projected to reach $20.9 billion by 2021 as contrasted with just $4.5 billion in Canada according to a report from Arcview Market Research and BDS Analytics.

U.S.-based firms entering Canadian market

In 2017 there was only one U.S. cannabis firm listing on the Canadian Securities Exchange (CSE) and it raised only $145,000. In contrast, in the first ten months of last year U.S.-based cannabis firms raised $1.1 billion U.S. on the CSE. This was about 60 percent of the total amount raised by all cannabis firms. In the first ten months of the year, U.S. firms invested $417.4 million in the CSE. The trend increased at the end of the year with several new firms being listed.

Richard Carleton CEO of the CSE said: “We have applications in hand from a number of significantly sized U.S. issuers and we’ve been talking to a number of folks who don’t have applications in yet but it seems a certainty that they will be showing up on our doorstep at some point in the first or second quarter of next year. The U.S. issuers are also providing a more compelling story to investors, coming to market with “a significant operating history, revenue in place and a significantly higher degree of maturity than we saw from the Canadian producers back in the day."

Canadian marijuana market's growth is slowing while US is accelerating

Investors may sense that the Canadian cannabis market growth is flattening somewhat. It is also plagued by supply shortages, and rather disappointing earnings. In contrast as more US states legalize recreational marijuana a much larger market than Canada's is expanding.

Steve Winokur, of Cannacord Genuity Group, one of the leading investment bankers in the industry said: “There are hundreds of businesses in the United States that are just getting their act together relative to accessing the capital markets and building their business plans, so there’s a lot of runway left for the U.S. industry.”

US companies may come to dominate the cannabis industry

Canadian companies have a head start in investing in Canada. Yet Canada's population is smaller than that of California. US firms are already selling in a much larger market, perhaps around ten times the size that Canada will be. A recent article notes: "As the thinking goes, America is where brands and fortunes are made, and there’s no reason to think that cannabis will be any different, despite the current federal prohibition."

Afzai Hasan, president of Origin House in Ottawa said: “We’re going to have a great cannabis industry here, but the people who, for whatever foolish reason, thought that Canada was going to dominate the world of cannabis, they need to disabuse themselves of that notion because it was never founded on any reality... We’re not as aggressive and competitive and capitalistic as the folks down south of the border.”

The CEO of Curaleaf, Joe Lusardi, a large US cannabis retailer does not like to be lumped in with Canadian competitors saying: “I don’t think we should be correlated with the Canadian stocks at all In many cases they’re just growers.” This may be overly negative about the role of Canadians in the cannabis industry. Some Canadian firms may very well expand into the US and be successful and also remain as retailers not just growers.

Previously published in Digital Journal