Canopy Growth Eyeing NASDAQ listing, But Bruce Linton’s Sector Comments Caught Our Attention

Canopy Growth Corp (TSX:WEED) (OTCMKTS:TWMJF) (FRA:11L1) CEO Bruce Linton presented at the $1,000/table gala at the Economic Club of Canada. The main event—a keynote address by Linton himself—elucidated viewpoints on the state of the cannabis industry, and where it is headed. While Bruce wowed WEED investors with cheery individual company news, it was his comments on other areas of the cannabis sector which investors should take notice.

But before we go there, let’s start with the good news for Canopy Growth investors which presaged a 9.76% gain in the stock price yesterday.

According to Bruce Linton, Canopy Growth has already looked into the possibility of dual-listing on the Tier-1 NASDAQ stock exchange. Apparently, plans were in the works last fall, but were suspended due to “complexities” surrounding a $245-million investment Constellation Brands Inc. made with the company. In Bruce’s words: “We prepared to list in October and we pulled it back, because trying to do the deal with Constellation was already 11 months of complexity.”

With the cementing of major U.S. distribution channels in the rear view mirror, Canopy Growth is re-focusing on expanding their investor profile. Although no specific timetable for NASDAQ listing has been given, much of the heavy-lifting required to obtain regulatory listing compliance has been accomplished. This is an important point, because the discovery process can take several months—years for some companies—to clear regulatory approval. If we’re reading the tea leaves correctly, Canopy could be only weeks away from joining NASDAQ.

Of course, the extraordinary momentum generated by NASDAQ visibility is no small deal. As we’ve recently seen with Cronos Group Inc. (CVE:MJN) (NASDAQ:CRON), the large pool of U.S. investors clamoring to purchase investment-grade cannabis companies can have a material impact of stock prices.

Since February 26, when Cronos started trading on NASDAQ, shares prices have skyrocketed 37-percent. Peak-to-trough, the company’s gain eclipsed 44-percent.

The impressive aspect to this performance is twofold. First, Cronos did not disseminate news to account for such buying pressure. Secondly, the cannabis sector in general had been in free-fall. From February 26-28, the Canadian Marijuana Index (CMI) fell approximately 14-percent. Even after paring most of its losses, the CMI is down 0.88% (as of this writing) since Cronos Group’s February 26 listing.

Thus, it doesn’t take a PHD in economics to glean the obvious. That is, insatiable inflows of American capital helped boost Cronos stock by far move than was otherwise warranted. As the Midas Letter pointed out recently, “We suspect the company benefited from the American public’s eagerness to invest in a respected, large cap cannabis producer. Currently, much of the American investment landscape is dotted with speculative micro-cap companies on secondary exchanges.”

Bingo.

Expect Canopy Growth to be the recipient of similar such USD inflows soon. As the pre-eminent name in the cannabis space, and with investment-grade options not yet saturated, Canopy could well experience their own “Cronos effect” upon arrival. In fact, this is likely already happening now that Bruce Linton has virtue-signaled the listing in advance.

Diversify Or Fall Behind The Investment Curve

Bruce Linton’s musings went well beyond the scope of his own company. In particular, his comments regarding monolithic cannabis producers were still reverberating on Bay St. this morning.

It wasn’t so much his opinion that refined products (as opposed to smoked bud itself) will mark a broader macro-shift within the cannabis industry. It was Bruce’s comments on the future of cash crop inputs which threw a wet blanket on the idea that marijuana is somehow ‘different’.

Specifically, the Canopy CEO believes companies setting up cannabis grow-ops could soon find themselves in similar positions as most other agricultural commodity producers. That is, providing low-margin cash crops to companies which have invested in the CAPEX to refine them. As Mr. Linton elucidates, “Low cost of production is a big deal, but (cannabis is) only an ingredient. It’s about as exciting over the next three, or four, or five years as the price of sugar in the context of any finished good that uses sugar.”

Ouch.

Such revelations are nothing new for people in the know. As Midas Letter CEO James West said back on December 31, 2017:

Already, institutional investors in Canada are telling me that the value of a license is approaching zero with no funded growing capacity. What is it worth with 200% more licenses?

After Bruce Linton’s comments yesterday, perhaps the more apropos question is “What is the enterprise value of non-diversified cannabis producers with marijuana cash crops only likely to yield low-to-high single digit returns?”

Conclusion

The answer to the above question is self-evident. It’s also the reason why investors are best served investing in diversified growers with tentacles in other areas. Whether that be delivery systems (i.e. vaporizers, inhalers), medicinal CBD/THC concentrates, supply chain software, or consumer edibles, it’s really a matter of diversify or get run over.

Of course, Canopy Growth has perhaps the best cannabis portfolio around. Because they produce the end-products and grow the crops, they can leverage their production costs in way monolithic growers cannot. Canopy also has leveraging power over other suppliers because they own the technology to refine bulk cannabis into higher-margin refined products. In short, they own the supply chain.

Ultimately, the moral of the story is this: Before you plunk down your hard earned investment dollars in cannabis stock, we suggest you make sure that company has definable revenue streams beyond cash crops. Neglecting this basic requirement might leave your investment lagging, even if marijuana rally iteration #3 comes calling.