Canadian Cannabis Shortage: BULLISH!
Last Wednesday, October 17, the legal marijuana age started in Canada. All you needed was proper ID, and you could buy weed openly and legally. It's a big deal. This is why cannabis stocks have been running higher lately. It is widely believed that the Canadian precedent will serve as a template for how legalization will go here in the U.S.
And if Canada's first day of legal pot sales is any indication, legal cannabis is a windfall. Canadian suppliers say they ran low or completely out of weed. Surprising, because it seems to me that the consensus was that there is too much weed already...
In terms of the cash value of sales, it's pretty amazing. Alberta reported 8,300 sales, generating $730,000 in sales. Nova Scotia said 12,180 sales generated $660,000. Quebec and British Columbia didn't report the value of sales, but combined, they reported a whopping 52,000 sales transactions!
If we use the cash values from Alberta and Nova Scotia, we can estimate that Quebec and BC might've generated another $4 million in sales. That would bring the total to about $5.3 million in revenue generated on the first day of legal sales.
Quebec's Société québécoise du cannabis (SQDC), an industry group, said: “This volume of orders far exceeds the SQDC’s expectations... Given the craze created by the legalization of cannabis and the scarcity of products across Canada, the SQDC expects significant short-term supply challenges for branches.”
“Craze created by the legalization of cannabis...”
“Significant short-term supply challenges...”
Phrases like these are music to any investor's ears.
(And it's not just weed. USA Today reported that a Girl Scout in Edmonton sold 30 boxes of cookies outside a pot store in 45 minutes!)
Here's what should get you really bullish on the potential for pot sales in the U.S. The U.S. population is about 10 times Canada's. Simple math suggests that first-day sales could be $50 million. At that rate, we're talking about $18 billion in sales for the first full year.
And for the most part, these initial numbers don't include higher-end cannabis products, like muffins or coffees or whatever.
I've read that alcohol sales in states that have legalized marijuana (Colorado) fall around 25%. This isn't exactly an apples to apples comparison, but it may be a little helpful. Annual alcohol sales in the U.S. are about $225 billion. If marijuana can take 25% of alcohol sales, we're talking $56 billion in annual revenue.
In other words, yes, there's a lot of uncertainty about the potential for U.S. pot sales. In just two paragraphs, I got to $18 and $56 billion. Either one is pretty good. Personally, I like that $56 billion figure. And it's not as wild as you might think.
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Industry analysts have already pegged $50 billion as a likely revenue target after a few years of legalization. But really, I think the timeline should be sped up a little. Because the $50 billion estimates are based on estimates of what illegal sales are right now. Somehow I don't think financial reporting on illegal activity is very accurate...
There are plenty of people out there saying that pot stocks are in a bubble, that there's too much supply of marijuana already, that booming early sales will level off after the thrill is gone...
But let me ask you this: What if that's just grumpy analysts being grumpy? What if the opposite is true? What if sales don't level off? And what if there really isn't enough supply?
I'm not just being contrarian here. The early signs from Canada are that sales will stay strong and that there really isn't enough supply. Interesting...
If you want to grow marijuana to supply this emerging market, you have to fund your operations yourself. There aren't any loans — there's no way to get funding, at least not through traditional channels like banks.
I'd say this puts the advantage squarely on bigger established companies that can secure their own funding.
Except for one company. There is exactly one company in the U.S. that is providing funding for companies that want to grow marijuana. Right now, this company is "restricted" to funding medical marijuana companies. But that's clearly a matter of semantics. Once the U.S. commits to a path toward legal marijuana, the floodgates open...
And this one unique marijuana company hits the big time. It is the ultimate picks-and-shovels play for the legal cannabis market.
I've done my due diligence on the whole market. This is the one stock I'm so confident about, I literally bet my job on it when I told my boss to buy it. He'll tell you about it here.
Until next time,
A 21-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He also contributes a weekly column to the Wealth Daily e-letter. To learn more about Briton, click here.
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