Canadian marijuana producers are leading the global marijuana sector.
With recreational and medical markets fully legal, companies can operate under government guidelines. That means access to banks and capital markets — important sources of funding for fueling growth.
Most Canadian producers start off listing on the Toronto Venture or Toronto Stock Exchanges. The Toronto Stock Exchange is the Canadian equivalent of the New York Stock Exchange (NYSE).
But Canadian producers saw an opportunity to tap into an even deeper capital market — the U.S.
Retail investors looking to invest in foreign-listed shares have a dilemma. They can buy on a foreign exchange with an international broker. But the trading fees are higher, and they are liable for filing international tax rates.
Or they can invest in “pinks,” otherwise known as over-the-counter (OTC) shares.
The OTC market is opaque. Brokers are able to manipulate the share price with the amount of demand or exchange rates. Trading costs may be the same as normal domestic trades, but investors may see smaller returns.
Realizing these problems, Canadian producers sought U.S. cross-listings.
Cronos Group and Canopy Growth Corp. Outperform the HMMJ Index
Cross-listing refers to a company listing its shares on a different stock exchange than its original one.
American investors looking to trade in the cannabis sector had few options. First movers were able to tap into capital from retail investors.
Cronos Group was the first producer to list on a U.S. exchange. In February 2018, it listed on the Nasdaq with its domestic ticker CRON.
This set the stage for other producers to seek a coveted U.S. cross-listing.
Canopy Growth Corp. upstaged Cronos and listed on the NYSE in May 2018. It chose to shed its Toronto ticker, WEED, for the more conservative CGC.
Getting listed on a U.S. exchange saw a rally in the share price.
Cronos outperformed the Horizons Marijuana Life Sciences Index exchange-traded fund (ETF) by 101.3%.
The ETF replicates the performance of the North American Marijuana Index, which tracks the performance of publicly listed companies in the cannabis industry.
And in the three months following its cross-listing to the U.S., Canopy’s shares outperformed the HMMJ ETF index by 41.5%.
Too Many Choices: a Tempered Rally
In the year following Canopy’s cross-listing, a host of Canadian producers have followed suit.
Aurora Cannabis Inc., Aphria Inc. and Hexo Corp. all sought U.S. listings. But 90-day returns followed each of their listings. Shares underperform the benchmark of the HMMJ ETF.
With so many options for U.S.-listed pot companies, the surge in buying has tempered.
Investors are doing their due diligence on pot stocks.
Last week, I wrote about the new pot metric we’ve developed at Banyan Hill.
It compares the enterprise value (EV) of a company against the value of its current products to consumers. To make it more comprehensive, I added another line to include the value of future production at peak capacity.
Below is a table of the largest U.S.-listed Canadian producers.
Don’t Lag Behind: Join the Marijuana Rally
On average, investors are willing to buy pot companies for 61 times their current production and nearly four times their forecasted future production.
But from the chart, we can see outliers on both ends. Cronos holds one of the richest premiums. That’s thanks to its $1.8 billion deal with Altria Group Inc.
Production volume lags the others. But many are hopeful that its partnership will meet greater market share down the road.
Aphria and CannTrust Holdings trade at a discount to their peers. While production volumes look strong, investors question management’s ability to deliver steady growth.
A major deal with a Fortune 500 company would send shares of either company ripping higher — if they can land one.
In Real Wealth Strategist, we are keeping a close eye on the marijuana space. We are looking for the best risk-to-reward plays to tap into the booming marijuana sector.
Consider the Horizons Marijuana Life Sciences Index ETF (Toronto: HMMJ). It will give you general exposure to the cannabis space.
Good investing,
Anthony Planas
Internal Analyst, Banyan Hill
P.S. Watch my latest marijuana market update video below. And check out my YouTube channel. Hit the subscribe button to receive a notification when I post new content.