3 Pot Stocks to Watch in Canada's Legalization 2.0

As Canada draws nearer to its second wave of cannabis legalization, these are some of the companies you'll want to keep an eye on.

We note that the subject contained in this article represents illegal activity in certain jurisdictions. Whilst we do not condone any acts which are contrary to any such laws, we understand that readers in those jurisdictions which have decriminalised cannabis may find this article of interest.

Canada is finally approaching Legalization 2.0, which will see cannabis extracts, edibles and concentrates become legal for recreational consumption to those over the age of 21.

While Legalization 2.0 is set to occur on October 17th—exactly one year after the country legalized cannabis for recreational use—the rollout may actually occur around mid-December, as companies have to register through Health Canada 60 days in advance before they put products on the shelves.

And there's plenty of reasons to be excited, as the legalization of a wider range of form factors could prove to be highly lucrative for Canada and investors, as consumers are increasingly seeking smoke-free methods of getting high. U.S. states have served as the best example for the changing cannabis landscape, with established cannabis markets like Colorado and California now consuming more edibles and extracts than raw flower itself.

ArcView Research pegs the cannabis edibles and beverages market to reach $4.1 billion by 2022, and Deloitte predicts that the new Legalization 2.0 market in Canada will be worth $2.7 billion.

While pot stocks have been going through a real rough patch lately, Legalization 2.0 may be just what they need to start to see an uptick. It may also be the perfect opportunity for investors to scoop up some shares while prices are low.

There is clearly money to be made amidst this next wave of legalization, and so we thought we'd help you out with these three stock picks.

Disclaimer: Past performance is not an indicator of future performance.

Disclaimer: past performance is not an indicator of future performance

1. Canopy Growth Corporation (NYSE:CGC)

However, it's certainly not all doom and gloom for the Canadian giant, as Canopy Growth recorded its largest-ever cannabis harvest during the June quarter. Nearly 41,000kg harvested, up 323% from the 9,685kg harvested one year earlier. The good news for investors is that over 70% of this harvest is graded as "high THC" strains, which sell very well. 

This may prove to be an important harvest for the company, as Canopy's recent downturn was due in part to the fact that the company overestimated Canadian consumer's demand for low-potency recreational oils and capsules. At the time, Canada previously only allowed products of low potency, and the market never took to them at all. As a result, Canopy took an $8 million hit.

Canopy Growth has had a challenging year. From firing the company's founder and co-CEO, Bruce Linton, to reporting a sequential decline in revenue and a $1.3 billion loss for the first quarter of their fiscal 2020, the company hasn't looked its' best.

The difference with Legalization 2.0 is that high-potency oils and capsules will now be available to the public, which may prove to be of much higher demand than their low-potency counterparts.

According to Deloitte, nearly half (45%) of consumers say they'll look for products that provide the level of potency they want. More product and potency choice means more satisfied consumers.

And of course, who could forget the 35% stake that Constellation Brands has in Canopy Growth?

While Constellation's Q2 results for 2020 showed a loss of $484.4 million from its investment in Canopy Growth, (results which undoubtedly led to the firing of Bruce Linton) the company is poised to grab Legalization 2.0 by the horns.

Canopy Growth, alongside Constellation Brands, is launching a portfolio of products, many of which are set to bring in higher profit margins than raw flower.

This includes a variety of drinks, edibles, skincare and baking products containing cannabis, as well as a host of CBD-based products. The company also plans to release products for pets, which will be produced in partnership with Martha Stewart.

In addition to this, Canopy is set to increase its physical store count in Canada from 460 in September to 600 by March 2020.

With an untapped market of "likely" investors, which Deloitte has identified, Canopy is making a lot of the necessary moves to attract this new market.

Disclaimer: Past performance is not an indicator of future performance.

Disclaimer: past performance is not an indicator of future performance

2. Aurora Cannabis (TSX: ACB)

Not even the Canadian cannabis giant Aurora has evaded the recent battering that most pot stocks have experienced. The company missed its revenue guidance and analysts' estimates while reporting a negative EBITDA of 11.7 million Canadian dollars.

However, management has stated that the company has been busy making the necessary investments for the upcoming arrival of Legalization 2.0, and the proof is in the pudding.

The company has indeed been investing, primarily in two new facilities—Aurora Sky in Edmonton and Aurora Sun in Alberta—which are expected to act as big catalysts for the company in the coming months.

The Aurora Sky facility also features a level of automation and robotics that will make it "the most advanced agricultural facility of any kind anywhere in the world," according to the company's CCO Cam Battley. As a result, the Sky facility's production efficiency per square foot has now become the highest in the global cannabis industry.

And the Aurora Sky facility isn't even the main event, as the Aurora Sun facility sits at a whopping 1.6 million square feet, double the size of Aurora Sky.

"Between those two facilities alone, we're going to produce over 330,000 kilograms of cannabis per year," stated Battley.

These facilities, primarily Aurora Sky, will serve as a hub for the production of newly legalized cannabis form factors such as edibles following Legalization 2.0.

Aurora also has a supply agreement with PAX Labs, a producer of cannabis vaporizers, which may help boost the company once the newer form factors become legal.

However, placing all your eggs in the vaporizer basket is a risky move in the current climate, as the vaping crisis rages on and consumer confidence in vapes hits an all-time low.

While some believe that Canada's staggered and delicate approach to cannabis regulation will provide consumers confidence that their products won't be tainted, it's also hard to turn a blind eye to hundreds of illnesses and a growing number of fatalities associated with vaporizer use.

It's uncertain at this point if added regulations will be placed upon vaporizers in the coming months, or if the cause behind the vaping illness will be identified and companies can instead move forward, as long as they avoid using the dangerous ingredient.

Though almost all of the vaping illnesses have occurred due to illegally procured vaporizers—which undergo no regulatory scrutiny—and so by comparison, established, regulated companies such as Aurora may not run users this same risk.

Disclaimer: Past performance is not an indicator of future performance.

Disclaimer: past performance is not an indicator of future performance

3. MediPharm Labs (TSX: LABS)

We would be remiss to leave out an extraction powerhouse like MediPharm Labs when sitting on the precipice of Canada's second wave of cannabis legalization, as extracts will hold the keys to the new kingdom.

Based in Barrie, Ontario, MediPharm received their Health Canada licence for cannabis oil production in 2018, before cannabis became legal for adult-use.

The company operates out of its wholly-owned 70,000 square foot Barrie facility which is ISO-rated clean and European GMP standards certified. The annual dried cannabis processing capacity for the facility is now at 300,000kg, and annual capacity is expected to increase to over 500,000kg by the end of this year.

Utilizing Vitalys Extraction machinery and technology, MediPharm Labs apply their patented methodology across state-of-the-art cannabis extraction, fractionation and distillation equipment.

While the company doesn't have a cultivation license, they are reliant on securing agreements with cultivators to ensure a sustainable supply of material inventory. For this reason, they've since become Canada's biggest buyer of cannabis.

In June, the company procured more than 9,000 kilograms of cannabis from 23 different Licensed Producers to be turned into oil, concentrates edibles and vape juice.

The company is ramping up their cannabis supplies in preparation for the upcoming legalization and has also secured several supply agreements to ensure they aren't left with huge swaths of unused cannabis.

In May, MediPharm secured an agreement with Cronos Group (TSX:CRON) to supply $30 million of cannabis concentrates over 18 months, with the potential to expand the agreement to $60 million over 24 months.

The company also has contracts in place with established Canadian growers like Canopy and Supreme Cannabis (TSE:FIRE) to ensure a constant stream of supply.

And when it comes down to it, their bottom line looks pretty good too. MediPharm's net income before tax was $4.1 million compared to a net loss of $0.3 million in Q1 2019. The company also has a very healthy looking balance sheet after gross proceeds of $75 million were received from an oversubscribed bought-deal offering, leaving a cash balance of $72.7 million as of June 30, 2019.

A cloudy future

These are some players you'll want to keep your eye on as the new wave of legalization will certainly spice things up for the Canadian cannabis market.

Time will also tell what impact the vaping crisis will play upon consumers' purchasing decisions and whether Canada's regulatory reputation is enough to instill consumer confidence in vaporizers.

Until then, the cannabis collapse continues, and stock prices continue to plummet. Could it be the perfect time to invest?

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Louis O'Neill
Louis O'Neill

Louis is a writer based in Sydney with a focus on social and political issues. Having interviewed local politicians and entrepreneurs, Louis now focuses on cannabis culture, legislation & reform.

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