The Coming End of the Second Prohibition

by Marin Katusa, Katusa Research:

Editor’s note: In this week’s edition of Katusa’s Investment Insights, our new Special Situations analyst Mike Chang and Marin look at a very interesting area of the venture capital world – marijuana. It’s a multi-billion-dollar sector enjoying huge amounts of new capital flows. Of course, what is enjoying huge capital flows also offers huge opportunity for speculators.

In early 2014, a tiny Canadian company raised money from investors with a wild idea. It planned to be one of the world’s largest growers and sellers of legal marijuana.

These days, “weed stocks” are hugely popular with investors. However, this company formed way before the sector became popular… and before many places in North America actually legalized weed. It was a weed stock before weed stocks were cool.

My good friend and colleague, the brilliant business mind Pat DiCapo, invited me to a private meeting about the idea he had for this company. I really liked its business plan and the management seemed smart, so I became one of its early very large shareholders.

I still laugh about that back then, when, my devout Catholic Italian in-laws asked me what I was working on during a family get together (you know the kind I am talking about, 40 Italians around a big table all eating insane amounts of food) and my answer was, “Nonna, I am in the marijuana business. I am now a drug dealer, like in the movies.” The family’s collective reaction was priceless.

Their reaction was priceless.

Today, this once very small, very speculative company is one of the world’s largest growers and sellers of marijuana. It’s also one of the world’s hottest stocks. This company – now called Canopy Growth Corp. – commands a huge $8 billion market valuation… and its shares have appreciated more than 14-fold in the past two years.

I have to confess: Although I saw huge long-term potential in the marijuana industry, I didn’t hold my Canopy Growth shares for the whole run higher. I sold my shares after making almost a ten bagger. At the time, I wanted to direct the capital into some other very large opportunities and my wife and I were building our dream house. And, my Italian in-laws were happy that I got out of the “drug business.”

Looking back I had to do what I did. I left a firm where I was at for a decade, took the Vancouver branch as my own and had to personally guarantee their salaries and the offices expenses. Not to mention I had no revenue coming in, I also had to buy out one of my partners in a fund and at the time I was personally the lead order in the Northern Dynasty private placements during the restructuring of the board in late 2015.  Not to mention my wife and I were building our dream house and our second child was on the way.  It all worked out well as I locked in +1,000 gains on Northern Dynasty and my office has doubled in size since then.  And my Italian in-laws are happy I am no longer in the “marijuana and drug business.  Lol”  However, I believe the marijuana industry has tremendous growth ahead of it. Since this area is very hot with the public, I believe it will offer tremendous speculative opportunities as well. Here’s how I see things in the weed industry right now…

America’s New Cash Crop

By now, you’ve surely heard the big picture case for investing in the marijuana industry. Laws related to marijuana consumption and production are being relaxed… with some U.S. states making recreational weed use legal. Now, the once-cooped up marijuana industry is poised for huge growth… much like the alcohol industry was after Prohibition ended in 1933.

This is a story that shady stock promoters, bankers, and brokers can use to get the public excited to invest in overvalued stocks and outright bad deals. However, there’s no denying that there is huge, legitimate growth ahead for weed.

Here’s the breakdown of which U.S. states have legalized weed and which are in the process of it. In the dark green states, weed is legal for medical and recreational use. In the light green states, weed is legal for just medical use. In the red states, weed is prohibited or allowed for limited medical use.

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Like it or hate it, marijuana’s popularity is undeniable.

According to a survey conducted jointly by Yahoo News and Marist University in the United States last year, 22% of adults – some 55 million people – reported the use of marijuana at least once in the past 12 months. Of that set, over 60% or people (about 35 million adults) reported using marijuana on at least a monthly basis.

This puts marijuana on the same standing as tobacco as far as usage goes – the CDC estimated that there were 36.5 million cigarette smokers in the U.S. population in 2015.

Marijuana users are often vilified as poisoning their minds. Compare this with tobacco, which is in contrast considered “cool” and glorified in movies.

And while I wouldn’t be caught dead doing either, the argument can also be made that marijuana actually has less harmful long-term effects than nicotine does. And then there’s marijuana’s legitimate medical applications as a pain reliever.

Taking that into consideration, it should make sense that 8 of the 50 states plus the District of Columbia have already fully legalized marijuana for recreational use, while another 22 permit its use for medical purposes. In the remaining states, cannabinoid products remain outright illegal in a small number, while the rest allow low-THC content medical extracts.

With all that said, it should come as no surprise that the weed industry has enjoyed huge growth over the last few years. Though overshadowed by Bitcoin’s explosive performance in recent times, marijuana has generated significant investor interest, becoming a $6.6 billion dollar industry in 2016. Of this amount, 71% belonged to the medical marijuana market, though this figure has likely already greatly changed since then as four of the eight states with legalized recreational-use marijuana had not yet implemented their new regulation as of 2016.

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