November 7, 2018 / 6:31 PM / 10 days ago

Michigan vote to legalize pot fires up investor momentum behind cannabis

NEW YORK (Reuters) - Michigan’s vote Tuesday to become the 10th U.S. state where the recreational use of cannabis is legal is adding more momentum to a trend that some investors now say is inevitable: that marijuana will become legal nationwide within the next 5 years.

FILE PHOTO: A small marijuana plant grows in a lab at the new Commercial Cannabis Production Program at Niagara College in Niagara-on-the-Lake, Ontario, Canada, October 9, 2018. REUTERS/Carlos Osorio/File Photo

As a result, companies, portfolio managers, and high-ranking executives are racing to position themselves to profit from what is expected to become a multi-billion dollar market.

Executives at companies including Amazon.com Inc (AMZN.O), Molson Coors Brewing Co (TAP.N), and Nike Inc (NKE.N) have jumped to roles at Canadian cannabis companies such as Tilray Inc (TLRY.O) and Canopy Growth Corp (WEED.TO) over the last 18 months in order to gain experience in the industry.

At the same time companies ranging from Coca-Cola Co (KO.N) to Corona beer-maker Constellation Brands Inc (STZ.N) have taken the first steps into building cannabis-infused products.

“We fully expect a successful regulated market to eventually develop around cannabis, and when it does, we expect it will disproportionately benefit the strongest innovators with well-branded products & robust supply chains,” said Bonnie Herzog, an analyst at Wells Fargo who is bullish on the shares of Constellation Brands.

Investors say that they are watching Canada, where the legal recreational use of marijuana went into effect in October, as a testing ground for retailers and companies before U.S. legalization.

“The Canadian legalization has been a major catalyst for growth for a lot of companies in this space, and big consumer companies in the U.S. are paying attention,” said Barbara Miller, a portfolio manager for the Federated Kaufmann line of funds.

“We’re seeing consumer product companies test the waters and try to figure out how cannabis will factor into existing products or into new lines of products,” she said, ranging from personal wellness products like CBD-infused lotion to consumable products like cannabis-infused beer.

Recreational marijuana sales in Canada are expected to generate $4.3 billion in revenue in 2019, or slightly more than 60 percent of the country’s total $7.1 billion marijuana market, which includes medical and illegal sales, consulting firm Deloitte noted.

In the U.S., cannabis remains illegal under federal law.

Senator Elizabeth Warren, who is widely expected to run for the Democratic presidential nomination in 2020, introduced a bipartisan bill in August that would amend the Controlled Substances Act to allow cannabis companies in states where marijuana is legal to open accounts at federally regulated financial institutions and remain exempt from federal persecution.

The Wine and Spirits Wholesalers of America, a trade group that represents more than 80 percent of all wines and spirits sold in the U.S., voiced support for legal cannabis in July.

American executives who have joined the Canadian cannabis industry say that they were motivated in part by the expectation that marijuana will become federally legal in the U.S. within the next few years, a decision that helped them balance out the danger of reputational risk associated with a substance that has long been associated with the black market.

“I had a negative perception of the industry initially and my first inclination was that cannabis companies were penny stocks and not that credible,” said Mark Castaneda, the chief financial officer at Tilray. It was only after a headhunter sold him on the industry that Castaneda felt comfortable enough to make the switch.

“I started to see that this was a lifetime chance because this is a massive shift where you know there are consumers who use this product and now that it was legal the market could be even larger,” he said, adding that he expects that Canadian cannabis companies such as his own will eventually expand into the U.S. once marijuana becomes legal.

The potential growth of the cannabis industry in the U.S. is evident in the work histories of new hires by Canadian cannabis companies that have their sights set on expansion, said David King, a senior portfolio manager at Columbia Threadneedle Investments who has invested in convertible bonds issued by Canopy Growth Corp.

“You go to roadshows to some of these cannabis companies and their new executives are coming from impressive places,” he said. “You have real adults running the company.”

Reporting by David Randall; Editing by Jennifer Ablan

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