The next catalyst for pot stocks

Thursday, 10 January 2019
Melbourne, Australia
By Bernd Struben

  • In the mailbag
  • ‘Vietnam Aims to Replace “Toxic” Facebook with Domestic Networks’

You’ve probably never heard of Michael Lavery.

But you may be familiar with Piper Jaffray Companies, the firm he works for.

Based in Minneapolis, in the US state of Minnesota, Piper Jaffray’s history goes all the way back to 1895. Though back then it held the rather cumbersome name of George B. Lane, Commercial Paper and Collateral Loans & Co.

Today the company has a market cap of US$1.03 billion. And in 2017 Forbes magazine honoured it as one of America’s 50 Most Trustworthy Financial Companies.

When analysts from Piper Jaffray make recommendations, investors tend to take note. Even more so when those recommendations involve the rapidly growing cannabis market.

From The Street:

Canopy Growth Corp.  (CGC) climbed 13.6% on Wednesday after Piper Jaffray analyst Michael Lavery initiated coverage on the Canadian cannabis company and Tilray Inc.  (TLRY) with overweight ratings…

Lavery said in a research note to investors that the global cannabis market has the potential to reach $15 billion to $50 billion in the near term and $250 billion to $500 billion on the long term…

Cowen analyst Vivien Azer was also bullish on the cannabis market, telling investors Tuesday that the U.S. market for cannabis has a lot of room to grow over the next decade with sales expected to reach $80 billion by 2030 if the federal legislation comes through.

“Our increased confidence reflects the bigger than expected increases that we continue to see for reported cannabis incidence among adults,” Azer wrote.’

A few brief points here.

First, the full article above notes that Tilray Inc closed 2.7% lower. Though the share price is still up 15.0% since last Thursday.

Second, do you find it as amusing as I do that Viven Azer notes, ‘the bigger than expected increases that we continue to see for reported cannabis incidence among adults’?

I’m not sure how analysts were attempting to gauge the size of Canada’s legal marijuana market before legalisation. Phone surveys? Extrapolations from police reports on ‘cannabis incidence’ during prohibition? Tarot cards?

It’s the same problem analysts are having today attempting to forecast how big this market could get if the US and other major nations — perhaps even Australia — legalise medicinal and recreational cannabis.

Hence the wildly differing potential market size forecasts.

I mentioned earlier this week that Zion Market Research estimates the global market could be worth US$62.9 billion by 2024. Then we have Cowen’s analyst predicting it could hit US$80 billion by 2030. And Piper Jaffray’s boffin forecasting US$15–50 billion in the near-term…and a staggering US$250–500 billion long-term.

There’s a saying in Dutch that captures the real methodology I suspect these forecasters are employing. Translated it goes something like, ‘holding a wet finger in the air’.

While this may give you a sense of the wind’s direction, it tells you little about the size of the front about to blow over your head.

I won’t venture any ‘wet finger’ guesses myself.

Suffice to say that the legal cannabis market is already worth more today than anyone could have forecast a few short years ago. Canopy Growth Corp [TSE:WEED] alone has a market cap of $15.3 billion.

And whether the global market surges ahead to $80 billion or $500 billion, there’s clearly big money to be made here.

But as with any industry, booming or no, getting into the right companies is crucial to your success as an investor. As is getting in at the right time.

Currently, even most of the better pot stocks are down from their September and October highs. Though with the size of the global legal market likely to keep growing — and ‘cannabis incidence among adults’ likely to be far higher than current methodology indicates — I expect most of these stocks will hit and surpass their 2018 highs soon enough.

It’s exciting to see a brand-new industry take life in such a short time. And it will be fascinating to see where it goes from here.

Our in-house pot-stock guru Sam Volkering agrees. That’s why he spent the last month of 2018 putting together a research package for cannabis investors.

It’s called ‘The Black Book of Cannabis’. And here’s what Sam has to say about it:

If you’ve wanted to learn more about investing in the cannabis industry…

If you want to break into a market where 1,000%-plus returns are possible…

Or if you’ve just been waiting for the right time to invest…

Then this research is for you.

You can get all the details here.

Now let’s have a look at the markets…

Markets

Overnight, the Dow Jones Industrial Average closed up 91.67 points, or 0.39%.

The S&P 500 gained 10.55 points, or 0.41%.

In Europe, the Euro Stoxx 50 index finished up 15.30 points, or 0.50%. Meanwhile, the FTSE 100 gained 0.66%, and Germany’s DAX closed up 89.34 points, or 0.83%.

In Asian markets, Japan’s Nikkei 225 is down 233.67 points, or 1.14%. China’s CSI 300 is up 0.37%.

In Australia, the S&P/ASX 200 is down 7.29 points, or 0.13%.

On the commodities markets, West Texas Intermediate crude oil is US$52.18 per barrel. Brent crude is US$61.44 per barrel.

That’s a 4.8% rise in the price of WTI since I wrote to you yesterday.

Part of that can be attributed to the improving outlook for world trade.

The US and China, as we covered yesterday, look close to ending 2018’s trade ructions. More trade means more international shipping alongside boosting the global growth outlook. These in turn see an increased demand for crude.

But I believe the rise also reflects the fact that oil was oversold.

Thanks to fracking technology freeing up previously unextractable oil, the US is now the world’s largest crude producer. But fracking isn’t cheap. And many US producers need prices in the US$50 range to be profitable.

With that in mind, I expect WTI to trade within a reasonably tight range around US$55 per barrel over the coming months. If it goes much higher, like when it reached US$76.41 on 3 October last year, you’ll see US producers scrambling to pump more.

Now the Saudis have agreed to some production cuts with OPEC. But over the longer term, Saudi Arabian oil supplies are even more immense than previously believed. And until there are truly viable energy alternatives, that oil will find its way onto the market.

According to The Australian, a review, conducted by Dallas-based DeGolyer & MacNaughton Corp, showed an increase in the Kingdom’s reserves:

Saudi Arabia’s total proven oil reserves, the largest in the world, stood at around 268.5 billion barrels of oil at the end of 2017, adjusted upward from the 266.3 billion-barrel figure the government published previously, the Saudi Energy Ministry said in a statement…

Saudi Arabia’s gas reserves were also revised upward to 325.1 trillion standard cubic feet from 307.9 trillion…

The kingdom’s actual oil and gas holdings are even larger than the new figures suggest. The numbers cover proven reserves and don’t include those that are probable, [Energy Minister Khalid] al-Falih told a news conference in Riyadh.

Something to keep in mind the next time you hear the oil bulls forecasting US$100 per barrel crude.

Turning to gold, the yellow metal is trading for US$1,292.76 (AU$1,802.51) per troy ounce. Silver is US$15.74 (AU$21.95) per troy ounce.

One bitcoin is worth US$3,995.54.

The Aussie dollar is worth 71.72 US cents.

In the mailbag

Staying on theme, I’ll cover off a few more reader letters today on whether Australia should follow Canada’s lead to legalise medicinal and recreational marijuana. (Some have been edited for length or clarity.)

As mentioned previously, we received more than 40 mails on this subject. Some 80% were in favour of legalisation. That’s too many for me to print them all. But thanks to everyone who took the time to write in.

The first letter today comes from reader Clive:

I believe the govt. should go ahead and legalise, regulate and tax marijuana for several reasons.

Those that use it illegally now will continue to do so wasting police and court time with tiny penalties when caught.

This govt. if it continues, needs to increase its taxation base as it is hell bent on tax reductions for its supporters… At least this tax will not affect me!

Then there’s this, from reader Ken:

To my mind results speak for themselves. The war on drugs has failed miserably. Contrast this with how HIV was handled in Australia which had considerable success. The difference … educate and help those who were adversely affected instead of victimising them.

I think that people who experiment with drugs, for whatever reason, are acting from the dumb side of their brain. However, to criminalise it (making it very profitable) or tax it seems to do nothing to stem the flow…

The push to tax things to prop up Government spending using badly considered research is farcical. Sure it gets money into Government coffers but they start to price themselves out of the market because “illegal” trafficking becomes highly profitable. I couldn’t help but laugh when the Government warned people not to buy smuggled cigarettes because it represented a “health hazard”. I don’t smoke but I know that visiting the right places could get me very cheap cigarettes or tobacco … why wouldn’t you?

Straight from the libertarian handbook.

Ken also had a swipe at the ridiculous concept of a salt tax akin to the health police’s proposed sugar taxes. But, as he admits, he got on a ‘bit of a rant’ there.

The third letter comes from reader Peter. He addresses many of the concerns raised by other readers, including the issue of excessive government taxation:

Legalisation of marijuana should occur in Australia with the following proviso’s:

1. It is not very highly taxed so as to give the criminals a break like cigarettes

2. There are sufficient controls in place so that driving under the influence can be detected and suitably punished same as alcohol

3. People must be able to grow two or three plants of their own so there is no central control, which would lead to taxation and criminal gang control

4. There be support set up for those who get addicted, this does happen and the first instances I knew of were in the 1960,s with contact workers in Africa. They became a danger to themselves with the work they had to do.

5. Work places be trained to detect marijuana if they are not already and deal with that the same way as any other drug including alcohol.

6. Rules and regulations for medicinal marijuana products should be quite separate to the personal recreational use laws, to reflect the very different plant varieties and the end uses for medicinal marijuana extracts.’

Reader Geoffrey urges caution:

No: I think it would be the thin end of the wedge and that the same rationale for doing so would in time be applied to other, ‘hard’ illicit drugs which would have worse consequences on society. At least wait and see what the results of Canada’s action will have over a reasonable length of time.’

Our last letter today comes from reader Nick:

It is my belief that legalising all illicit drugs would be the best and only way forward.

1. Eliminates the black market, as long as the tax is not ridiculous

2. Allows proper quality control and less surprise packages for users

3. Generates huge income for the country

4. Frees up police resources to fight crime

5. Young people would find it uncool to start something that Grandpa can do legally.

Thanks again to everyone for writing in.

I’m not sure we’ll achieve the same…erm…buzz when it comes to energy stocks or trading options, but I’ll be sure to reach out to you for more feedback again.

And if you haven’t already, don’t forget to check out Sam Volkering’s ‘Black Book of Cannabis’.

Now before you sign off, here’s the latest on creeping global censorship from The Australian Tribune:

‘Vietnam Aims to Replace “Toxic” Facebook with Domestic Networks’

The internet and social media outlets like Facebook were supposed to increase people’s freedoms. The technology was meant to enable the free exchange of ideas across the globe. All sorts of uncensored ideas.

The reality is turning out to be quite different.

Governments the world over — even in supposedly free societies like Australia, the EU and the US — are moving to…

If you’re fed up with sanitised, politically correct dogma cut and pasted from one mainstream source to another then The Australian Tribune is for you.

And it’s absolutely free.

Sign up here to get The Australian Tribune delivered free to your inbox five days per week.

You can visit our website at https://www.theaustraliantribune.com.au/ to read the complete article above now.

Cheers,
Bernd