The world is changing. It aways has. And the investing world changes right along with it.
For example, can you imagine a young Warren Buffett searching through small cap companies looking for opportunities amongst marijuana companies?
Yet, that might be exactly what a young Buffett would be be doing today, as marijuana becomes more and more accepted by society. The result of this acceptance is one of the better growth industries for the next couple of decades.
The Donald Trump victory was not the only big news of this past election cycle. We also had four states pass ballot initiatives that legalized non-medical marijuana. Today, 1 in every 5 American citizens live in a state where they can use marijuana without a doctor’s note.
That won’t be the end of it, either.
According to Arcview Market Research the marijuana market posted $6.7 billion in revenue in 2016 which was an increase of 30% from the prior year. From there, Arcview believes that revenue will grow at a compounded rate of 25% per year through 2021 when North American revenue will exceed $20 billion.
I thought this statement from Arcview was pretty interesting:
“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 (19%) in the 1990s and the broadband internet (29%) in the 2000s,”
There isn’t much debating the fact that there are going to be some very successful companies in this space given how fast revenue is set to grow. As investors we need to get ourselves up to speed on some of the better capitalized players.
For reasons I’ll explain in a moment I believe that looking north of the border may be the best way to go.
Emerald Health Therapeutics (TBQBF) – Trading At A Discount To Peers?
I’ll admit that I’m playing catch-up here. The sector is new to me and so are the companies.
The first company that popped up on my radar is Emerald Health Therapeutics and it did so because it has a good sized market capitalization and appears to be trading at a discount to its peers.
Source: Emerald Health Therapeutics
The larger market capitalization is important to me because I’m not interested in sifting through the the really tiny marijuana stocks where finding something of quality is highly unlikely.
Emerald has both a good sized market cap and has recently completed an equity raise through Dundee Capital Partners. Being able to raise equity capital provides Emerald with a big advantage in a sector where few competitors have that option.
Source: Emerald Health Therapeutics
Emerald Health is headquartered in Victoria, B.C. Canada and is listed primarily on the TSXV under the ticker “EMH”. It is also trades in the United States under the symbol “TBQBF”.
The Company is the parent of its wholly-owned subsidiary Botanicals. Botanicals describes its principal business as the production and sale of medical marijuana.
Emerald/Botanicals operates pursuant to a license issued under the Access to Cannabis for Medical Purposes Regulations. The company also received in November 2015 a Supplemental License from Health Canada authorizing Botanicals to produce cannabis oils and in July 2016, Botanicals received a Supplemental Sales License to sell these products.
Emerald/Botanicals’ stated goal is to remain a reputable and trusted provider of medical marijuana, and to accelerate the growth of its client base and sales revenue after the launch of its cannabis oil products. To reach these goals, Botanicals plans to provide a consistent supply of high quality products as well as maintain a level of excellence in client services.
Through a combination of in house grow and wholesale purchase from other Licensed Producers, Botanicals expects to continue to provide a wide range of strains of dried marijuana and oils.
Source: Emerald Heath Therapeutics
During the first four months of 2016, Emerald/Botanicals primarily focused on developing the operating procedures required to manufacture cannabis oils in order to apply to Health Canada for a Supplemental Licence, allowing for the sale of the oils.
The application for the sales licence was submitted in April 2016 and in July 2016 the company received approval to sell cannabis oils. Once this approval was received, production began on three initial products that were available for sale starting in September 2016.
The three products currently in production include: Tetrahydrocannabinolic acid (“THCA”) oil, Tetrahydrocannabinol (“THC”) oil, as well as two different strengths of oils containing both THC and cannabidiol (“CBD”).
The cannabis oils are whole plant extracts that deliver the benefits of cannabinoids orally.
Emerald/Botanicals expects to launch a fourth product, a high CBD oil, and introduce new oils produced by supercritical fluid extraction in the first half of 2017.
In addition to developing the new cannabis oil products, the company also launched a new website and a new logo in June 2016 and has re-branded its products by way of new packaging and increased social media presence and community engagement on Instagram and Facebook.
Botanicals e-commerce ordering system was also updated improving the efficiency of client ordering and inventory management.
During the 2016, Emerald/Botanicals produced several high quality dried marihuana products that sold out very quickly. However, due to limited growth space, the company was limited on the volume of product it is able to grow has had to purchase additional strains of dried medical marihuana from other Licenced Producers to supplement inventory levels for both dried medical marihuana sales and cannabis oil production.
That is not optimal as it eats into profit margins.
Therefore, the company is actively pursuing expansion options that would allow for increased production. On that front the company recently (as previously mentioned) raised $12 million through an equity issuance which will allow for growth expansion capital spending.
Being able to access that capital is a huge advantage for Emerald/Botanicals. There aren’t many competitors that can get funded for expansion.
Source: Emerald Health
This $12 million will more than cover the $10 million of growth capital spending that is budgeted for 2017.
That cash plus having a debt free balance sheet puts Emerald on sound financial footing for 2017.
On top of that balance sheet strength, being one of the limited number of Licensed Producers with scalable systems and processes, as well as access to capital markets positions the company to take advantage of what this industry has in front of it.
Source: Emerald Heath Therapeutics
Where To Go From Here?
I view the legalization as being an eventual certainty across North America. However, I think getting exposure to this sector in Canada may be the way to go.
Prime Minister Trudeau’s stated plan is to legalize and regulate marijuana. This is going to happen at the national level and could happen sooner rather than later.
Trudeau’s reasoning for this is as follows:
“Secondly, we know that criminal organizations and street gangs are making billions of dollars off of the sale of marijuana. We feel that regulating it, controlling it will bring that revenue out of the pockets of criminals and put it into a system where we can both monitor, tax it and ensure that we are supporting people who are facing challenges related or unrelated to drug use.”
Emerald Health is a licensed operator that provides exposure to this. I hope to dig up a few others in the near future.
Disclosure: I don’t own shares of any company mentioned in this article