Canadian Licensed producers still best bet for international marijuana investors, says M Partners

An uncertain political environment down south coupled with international ambitions means Canadian Licensed Producers are still the best bet for international investors looking for exposure to marijuana stocks, says M Partners analyst Mason Brown.

Yesterday, Canopy Growth Corp. (Canopy Growth Stock Quote, Chart, News: TSX:CGC) announced it would acquire German-based pharmaceutical distributor MedCann.

“Germans need access to high-quality cannabis and Tweed’s products are proving to be up to the very strict standards set by the federal government,” said Medcann founder Dr. P. Debs. “Working together as one team will allow Canopy Growth through Tweed, Tweed Farms, and future production sites to supply the unmet demand that has been building over the past decade.”

Brown says that while the German marijuana market is still “miniscule”, the company is clearly moving toward a system similar to what Canada has.

The analyst says he believes a mature German cannabis market could be worth $3.7-billion.

International ambitions such as the ones demonstrated by Canopy are one clear sign that Canada is leading the charge on medical marijuana and has the most investible options, says Brown. The other, he says, is a U.S. environment that is suddenly up in the air.

“Canadian LPs continue to remain the best investment for investors seeking exposure to the legalization of cannabis movement both in Canada and globally, and Canopy, given its market positioning and size, is leading the charge,” he says. “The MedCann acquisition is one of multiple global transactions that now span Canada, Brazil, Germany, and Australia. In our last note, we highlighted how we believe a Republican win has brought increased interest in Canadian LPs from US investors post-election. Further confusing the USA’s stance on federal legalization occurred when President-elect Donald Trump nominated Senator Jeff Sessions to be attorney general. Mr. Sessions appears entirely against legal cannabis and has been quoted saying “good people don’t smoke marijuana” and that legalizing marijuana is “a mistake”. This is positive for Canadian LPs as it gives them more time to build upon their first mover advantage by enhancing technical expertise, expanding production capacity, and growing globally. For each global expansion (ownership of equity, import/export agreements, research partnerships, JVs), Canopy builds its brand and its footprint and further solidifies the company’s leadership position.”

Brown says marijuana is clearly becoming mainstream, pointing to recent comments from Rob Sands, the CEO of Constellation Brands, which is the owner of the Corona, Modelo, and Svedka Vodka brands. Brown said the world’s largest wine producer would be looking at getting into cannabis.

“’Why wouldn’t big business…be acutely interest in a category of that magnitude…if there’s a lot of money involved, it’s not going to be left to small momand-pops,” he told Bloomberg recently.

Brown believes the potential for Canadian Licensed Producers to be acquired by large competitors is very real.

In today’s research update to clients, Brown maintained his “Hold” rating on Canopy Growth Corp. but raised his one-year price target on the stock from $7.80 to $10.40, implyig a return of -7 per cent at the time of publication.