It’s the “retail investor frenzy” luring U.S. cannabis companies to Canada’s junior stock exchange, according to a Colorado-based venture capitalist, not a sense that the pot industry north of the border offers superior growth opportunities.
Five American-headquartered marijuana firms have listed on the Canadian Securities Exchange (CSE) so far in 2018, the most prominent being MedMen Enterprises Inc. (MMEN.CN), a California-based chain of marijuana retail stores across three U.S. states, with an expanding cultivation footprint.
Micah Tapman, co-founder and managing director of the US$18 million venture fund Canopy Ventures, said it’s obvious the growth opportunities in Canada pale in comparison to U.S. states where recreational marijuana is legal.
“The Canadian market is essentially micro,” he told Yahoo Canada Finance. “It’s equivalent to investing in one state in the U.S. It’s a very small market.”
CIBC analyst John Zamparo forecast in May that the legal adult-use cannabis market in Canada will approach $6.5 billion in retail sales by 2020. A report released a month earlier by Arcview Market Research and BDS Analytics titled “California: The Golden Opportunity” projected sales in the sunshine state would grow to US$7.7 billion by 2021.
Still, the notion that Canada will emerge as a global marijuana leader once the drug is legalized in the fall is a popular one.
Canopy Growth Corporation’s (WEED.TO) $5 billion deal with beer and spirit giant Constellation Brands Inc. (STZ.N) sent shares of the Smiths Falls, Ont.-based weed company to record highs. Canopy’s market value is now roughly on par with plane and train-maker Bombardier Inc., (BBD-B.TO) and retailer Canadian Tire Corp. (CTC.TO) It’s now the biggest company on Canada’s health-care index, surpassing Bausch Health Cos. (BHC.TO), formally Valeant Pharmaceuticals.
Constellation Brands’ expanding stake in Canopy has ignited investor interest in other marijuana players. The Horizons Marijuana Life Sciences ETF (HMMJ.TO), which tracks a basket of cannabis companies, has added more than 20 per cent since the deal was announced on Aug. 15.
Canada’s cannabis clout is even getting recognized by rock and roll royalty. David Crosby recently told The Globe and Mail, “I think Canadians could congratulate themselves for having a country that was smart enough to wind up being where all the marijuana companies are based.”
Tapman isn’t convinced Canada’s pending marijuana legalization on Oct. 17 will be enough to solidify the country as a global industry leader.
“There is a lot of hype in this belief that Canada is going to be able to leverage its position as a first-mover for the developed countries on legalization into this lock on the global cannabis market,” he said. “To put it bluntly, Canada doesn’t lead the world in anything in particular. It’s a small place.”
Small has been the operative word for U.S. cannabis companies when it comes to tapping into investment through the CSE.
MedMen is among the string of U.S. cannabis players to complete a reverse takeover of a tiny publicly-traded Canadian company to get on the exchange. In MedMen’s case, it was Ladera Ventures Corp., a company involved in the decidedly un-groovy business of operating oil and natural gas properties in Alberta.
For Tapman, that low barrier-to-entry means retail investors can expect the excitement around pot stocks to continue, for better or worse.
“In Canada, there is this history of micro companies with minimal revenues and nothing really on the balance sheet throwing their stock up on the the CSE, or even the TSX Venture, and bringing in many, many retail investors,” he said. “The reality is, there will be a major market correction as the reality of Oct. 17 hits, and people realize that these companies aren’t producing great revenues or profitability yet. This was a lot of hype and a lot of stories.”