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The Great White North is just days away from the first ever country-wide “hot box,” with the legalization of recreational cannabis set to take effect on Oct. 17, 2018. Producers of poutines, bacon, syrup, and Canada Dry are sending extra rations to convenient stores in preparation of massive outbreaks of the munchies. 

The hype around the marijuana market suggests that retail investors have much to gain from focusing their investments in cannabis. Afzal Hazan, president of CannaRoyalty Corp, a provider of royalty financing to regulated cannabis industries, suggests that the excitement exhibited from new investors is similar to that of moments in history when people invested in an industry they didn’t feely comprehend. 

“There is a Google or Amazon of cannabis lurking out there somewhere, but trying to find them is like looking for a needle in a haystack. People that invest in those companies are going to do phenomenally…But there’s also going to be a whole lot of people that get up in things that turn out to be a flash in the pan too.”

– Afzal Hazan President CannaRoyalty Corp. 

When Hazan refers to companies exhibiting “flash in the pan” characteristics, he is suggesting that the commotion surrounding legalization in Canada will not create long-term gains for investors, it will be short-lived and unrepeatable. This brings up concern for investors who feel pulled in different directions. The question, then, is how to recognize a company destined for success versus a company experiencing a“flash in the pan.”

First and foremost, the adage of doing your research rings especially true for investors interested in the cannabis market, but also in any market of interest as well. More times than not, a first-time investor in the sector will invest in just a few companies. As a typically risky move, even more so in the cannabis sector, because most of these companies have very little operating experience. If you put all of your eggs in one or two baskets, you are at greater risk in the event of a massive loss. 

Additionally, companies that trade in cannabis are not very transparent with their fair value disclosures and information related to what they are doing now “to its purported end state.” Last week the Canadian Securities Administrators (CSA) conducted an extensive analysis of “disclosure practices of 70 Canadian and U.S. cannabis producers, and found that some companies were “inconsistent in complying with Canadian securities requirements like providing forward-looking information and giving guidance for balanced disclosure.”

“Licensed cannabis producers often did not provide sufficient information in their financial statements and management’s discussion and analysis for an investor to understand their financial performance”

Canadian Securities Administrators Report 2018

Let’s take a moment and understand what the CSA report presents. Licensed cannabis producers are not providing enough information in their financials for investors to truly understand how each company is performing. According to the report, 100 percent of the producers reviewed in the report needed to improve their fair value disclosures. 

The review conducted by the CSA provides us with a framework for which we can understand what all separate the winners from the losers following the events of Oct. 17. 

Greg Taylor, manager of the Purpose Marijuana Opportunities Fund, explains:

“everyone has to remember that this is a new industry and at the end of the day, not everyone is going to win. There will be some winners that are going to be massive, but there is also going to be a lot of companies that just don’t make it.”

As a result of recreational legalization, cannabis markets in Canada are likely to increase rapidly over time. Many analysts are suggesting that the key to success for cannabis companies is their willingness to broaden their horizons and participate in international markets. According to data gathered by ArcView Market Research, Germany is currently the largest marijuana market outside of North America, with sales projected to reach $1.6 billion in 2022. 

Canadian cannabis players such as Canopy Growth. (CGC), Tilray Inc, (TLRY) and Aurora Cannabis Inc. (ACBFF) should heed the call and look to global markets if they wish to protect their strong foothold in the sector. 

Greg Taylor says that in addition participation in the international market, successful cannabis companies need to diversify their product offerings, and look to oils and beverages, not solely flower. 

I firmly believe the marijuana market in Canada is about to get as high as its consumers, but investors need to do their homework, understand the value of the companies they invest in and watch their companies tackle this rapidly budding industry.  

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