The rise of cannabis: the sweet smell of success?

Last year, Canada became the first industrialised country in the world to legalise recreational marijuana and has helped cannabis shed its taboo label and be viewed as a legitimate business. Since then, marijuana legalisation has spread across the US as well, with nine states legalising recreational marijuana and 30 states legalising medicinal cannabis. Medicinal cannabis has also been legalised in Australia, Germany, and the United Kingdom and a groundswell for support is gaining traction here in New Zealand.

CBD 101

So, what's all the hype about? Non-psychotropic Cannabidiol (CBD) is one of the most medicinal compounds in the cannabis plant, reportedly helping with everything from arthritis to epilepsy and cancer. According to the Brightfield Group, the global market for CBD will top $22 billion by 2022. Outside of New Zealand, you can find cannabidiol everywhere these days, from beers, gummies, chocolates and marshmallows; lotions, oils and even suppositories. It might be early days for New Zealand's medical marijuana industry, but big moves are being made offshore; a UK company has already filed 14 patents that would give them a stronghold on the use of CBD to treat medical conditions.

Cannabis shares are lit

Aurora Cannabis (ACB), Tilray (TLRY), and Canopy Growth Company (CGC) are just a few of the hot marijuana companies we saw hit the markets in 2018. This "Cannabis Craze" had everyone and their dealers (joke) buying up marijuana shares on Hatch. Cannabis shares currently comprise 10 of the 3000+ shares available on Hatch and popular ones with investors include Aurora, Cronos, Canopy Growth, Tilray, Hexo Corp, and Aphria Inc. The most popular exchange-traded fund is the Alternative Harvest ETF (MJ), giving investors broad exposure to this emerging industry. Fun fact: Approximately 10% of total shares purchased via Hatch have been cannabis shares.

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Big business bets on marijuana boom

Significant investments and partnerships between marijuana sellers and blue-chip consumer companies underline just how mainstream marijuana has become. For instance, Corona beer owner Constellation Brands has a 35% stake in Canopy Growth and disclosed that it will probably boost its stake in Canopy to 50% soon. Marlboro-owner Altria Group invested $1.8 billion in cannabis producer Cronos Group, and Tilray is working on cannabis-infused drinks with Budweiser owner Anheuser-Busch InBev.

Not happy with sitting on the sidelines, other companies have also paired up in recent months as well like Molson Coors who announced a partnership with Canadian producer HEXO Corp. Perhaps the biggest move this year is Canopy Growth's deal to pay US$300 million for the right to buy US cannabis company Acreage Holdings Inc. If marijuana production and sale become federally legal in the US and the deal goes through, Canopy could be considered the first global cannabis powerhouse, giving it a strong foothold in the lucrative US market, which is estimated to be roughly ten times the size of Canada's market.

The good, the bad, and the ugly

There's a real possibility that the marijuana industry will be the most significant growth story of our generation. In 2015 alone, the market was worth $5.4 billion in worldwide legal sales and based on estimates from Wall Street investment bank Cowen Group, by 2030 sales could soar to $75 billion. As with all things investing, there are risks. In a nascent industry, the greatest risk includes regulatory red tape. Government policies could impede the ability of companies to operate as freely as they do today. New cannabis entrants deserve intense scrutiny, investors should be wary of those that don’t formally list on major markets and are left unregulated.  Share prices have increased (and decreased, and increased) so rapidly, that growth prospects and valuations should be carefully considered. As with any emerging sector, look for companies with access to capital, strong management teams, and innovative or proprietary products.

With a global shift in marijuana acceptance, the cannabis industry is an exciting emerging sector with a lot of room left to grow. Though sometimes compared to the tech dot-com bubble, there are bound to be winners and losers. Educating yourself on the various risks associated with investing in the cannabis industry will help limit losses and improve the odds of picking the winners.

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