The day is finally here.
Recreational weed goes legal in Canada today.
I'm actually in British Columbia for this historic occasion, doing some diligence on the industry.
What's emerged is a small group of lead dogs in the space. You know the names: Canopy, Aurora, Aphria, and Tilray.
But they are lead dogs only in the sense that they were some of the first companies to be awarded a coveted "LP" - making them Licensed Producers.
That early-mover advantage has afforded those companies a chance to get out ahead of the pack. They caught the wave just right, were able to use that wave to raise significant amounts of money at increasingly higher prices, and have gone on a spending spree as a result, acquiring significant square footage for growing and rolling up mom-and-pop shops in everything from edibles to extracts to gain a toehold in as many segments of the business as possible.
Here's my pre-diatribe caveat: We should be grateful these companies paved a new path forward. That they made the world pay attention. That they attracted some of the world's biggest companies and brands - Constellation Brands, Coca-Cola, Altria, etc. - into committing billions to a ground-floor industry. That they lit the fuse.
But I must say, at this point I'm beginning to worry that some of those fuses may not light the charge. That they're, for lack of a better word, duds.
Just one little anecdote for you to sprinkle with as much salt as you deem necessary...
Back in mid-August, the very same week Canopy Growth Corp. (TSX: WEED)(NYSE: CGC) announced its landmark deal with Constellation Brands that would see the venerable liquor company invest C$5 billion in Canopy... Canopy also happened to release its Q1 2019 financial results.
The quarterly numbers were appropriately overshadowed by the Constellation announcement.
But if you shine a bit of light on them, a different picture might emerge.
Canopy produced 9,685 kilograms of cannabis in the quarter. It produced 4,811 kilograms in the preceding quarter. So in the past two quarters it produced 14,496 kilograms of cannabis.
It ended the quarter with 19,921 kilograms in inventory. So it isn't selling anything, but rather building inventory. That all checks out, as the market in Canada wasn't legal so there was no one to sell to.
But that's not the entire story...
Canopy Growth also ended the quarter with 2.4 million square feet of licensed indoor grow space.
Modern commercial cannabis operations routinely harvest 100-300 grams per square foot of growing space. The calculator tells me, then, even at the low range, that with 2.4 million square feet, Canopy should be able to grow somewhere in the range of 240,000 kilograms per harvest.
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But it only produced 9,685 kilograms in the past quarter - a mere 4% of what its capacity should be.
Where are the other hundreds of thousands of kilos?
Is Canopy behind on its build out? Is it not attaining maximum yields? Is it touting grow space it has, but that is not currently producing? Did it have to destroy crops because of Health Canada violations that it buried?
I don't know.
But I do know these are the questions you should be asking of a company that generates C$26 million in quarterly revenue but has a market cap of C$15.8 billion.
Now that cannabis is legal in Canada we'll get a real sense of who's talking the talk and who's walking the walk.
Over the next few quarters, we should get a good look at who's swimming naked.
We've done well for you so far by identifying the trend early and making quality recommendations. In Nick's Notebook, we've financed five cannabis companies and all have returned several hundred percent.
Jimmy Mengel, in The Marijuana Manifesto, has made his readers thousands of percent in the early days of this market. See what he's recommending now.
Call it like you see it,
Nick Hodge
Nick is the founder and president of the Outsider Club, and the investment director of the thousands-strong stock advisories, Early Advantage and Wall Street's Underground Profits. He also heads Nick's Notebook, a private placement and alert service that has raised tens of millions of dollars of investment capital for resource, energy, cannabis, and medical technology companies. Co-author of two best-selling investment books, including Energy Investing for Dummies, his insights have been shared on news programs and in magazines and newspapers around the world. For more on Nick, take a look at his editor's page.