One Stock That Makes for a Great Acquisition Target
The new year has brought with it good fortune for marijuana investors. Marijuana stocks are on a tear, and there’s a good reason why. For the first time in history, Americans living in the largest U.S. state are getting to enjoy recreational pot legally.
In case you missed it, recreational marijuana began legally selling in California for the first time on January 1, 2018. The decision to legalize recreational pot was made during the 2016 elections, when an overwhelming majority voted to legalize it, but official sales began just now.
The lineups outside marijuana dispensaries within the state have rejuvenated investor spirits. For many investors who feared that their marijuana investments were seemingly dying a slow death, this little news has breathed fresh air into them.
There are now some very plausible reasons why 2018 could turn out to be the best year for marijuana stocks.
Legal sales of marijuana in North America (U.S. and Canada) are estimated to have reached close to $10.0 billion in 2017. It doesn’t take one to be a genius to see where they’d be heading next once Canada fully legalizes pot for recreational use this summer.
With that, one of my marijuana stock predictions for 2018 has proven to be on target. So now I’m more focused on another prediction I made last year–that is, that we’ll be seeing vertical or horizontal consolidation within the marijuana industry in 2018.
That, too, may be close to coming true.
The Map Reveals Where the Treasure Is Hidden
There are a total of 84 “Authorized Licensed Producers of Cannabis for Medical Purposes” in Canada. These are the companies that meet Health Canada’s stringent guidelines for producing and selling marijuana or its derivative products, like oils and capsules.
A good 47 of these licensed producers (LPs) received their licenses in 2017, mostly in the past four months.
What I’m trying to get at here is that the industry, which has been in the making for years, has witnessed a major growth spurt just months ahead of legalization day.
Just ask yourself, with so many marijuana companies out there, what are the odds that they may all make money and are profitable?
As much as I’m bullish on this industry, I can’t ignore the reality that the chances of that happening in 2018 are very slim. Just look at the financial statements of most of these marijuana companies; only a handful of them are cash flow positive. The reality is that profitable marijuana companies are like rare gems–hard to find.
So just think about it: what happens to all these little LPs popping up here and there?
Well, many of them may not be around in a couple of years. Some may eventually succumb to competitive pressures and die a painful death. After all, the more sellers there are, the more competition there is and the more lethal their pricing war will be. Others may end up being acquired by the big players.
It is this second kind of marijuana companies that I’ll be eyeing in 2018.
So here I am, looking at the map of Canada that highlights all the licensed marijuana producers in the country, and I can’t help but notice something peculiar. (Source: “Authorized Licensed Producers of Cannabis for Medical Purposes,” Government of Canada, last accessed January 4, 2018.)
Here are my takeaways from a quick inspection.
- Of all the 84 licensed producers (LPs), more than half are based in the province of Ontario.
- The majority of the remaining producers are concentrated in the western provinces of British Columbia, Alberta, Saskatchewan, and Manitoba.
- The eastern end of Canada has a dearth of producers. Only nine of the 84 LPs have set up any production facilities in the east.
- Canada’s second-most populated province, Quebec, has only four LPs.
- Out of the four biggest Canadian marijuana companies, only one has its footprints running across the map.
Recall that the Canadian marijuana industry is dominated by the four biggest publicly traded marijuana companies: Canopy Growth Corp (TSE:WEED, OTCMKTS:TWMJF), Aurora Cannabis Inc (TSE:ACB, OTCMKTS:ACBFF), Aphria Inc (TSE:APH, OTCMKTS:APHQF) and MedReleaf Corp (TSE:LEAF, OTCMKTS:MEDFF).
Vancouver-based Aurora is the only company that has seemingly earned this unique advantage. This puts the remaining three at an apparent disadvantage as the industry gears up for full legalization in 2018.
Aurora’s biggest production site, “Aurora Sky,” is in the west in Edmonton, Alberta, where it is being expanded to a gigantic 800,000 square feet. In the east, the company has two production facilities near Montreal, Quebec, “Aurora Vie” and the “Lachute Facility.”
On top of that, it has recently made a hostile takeover offer to shareholders of CanniMed Therapeutics, a Saskatchewan-based marijuana company operating in Ontario’s neighborhood. With that, Aurora has virtually all of Canada covered.
By contrast, take a look at the biggest marijuana company, Canopy Growth. It is centered in and around Ontario. All of its production facilities, save one, are in Ontario, the only other being in Saskatchewan. Aphria and MedReleaf are no different.
For each of them, acquiring a cheap, well-positioned, smaller marijuana company ahead of legalization may serve as a great buffer against competition.
One Marijuana Company That Makes a Great Target
This brings us to the one marijuana company that, I believe, could make for a great acquisition target.
Based in Moncton, this marijuana company is one of the only two licensed producers in the Canadian province of New Brunswick. I’m talking about OrganiGram Holdings Inc (CVE: OGI, OTCMKTS: OGRMF).
With the most recently reported annual sales in excess of $7.74 million, cash worth $1.96 million lying in its bank accounts, and an additional $32.0 million in liquid securities, OrganiGram could make for an ideal acquisition target for a major player looking for exposure in the east.
By the way, New Brunswick is the first Canadian province to be selling recreational pot ahead of full federal-level legalization.
The province has officially signed a deal with the two local LPs (one of which is OrganiGram), and externally with Canopy Growth, to supply recreational pot within the province. (Source: “New Brunswick says it’s the first province to secure a full cannabis supply,” Toronto Star, November 20, 2017.)
Chart courtesy of TradingView.com
OrganiGram stock is already up more than 45% in the past one month alone and has returned more than 1,100% in its brief four-year trading history. It is still trading under $5.00, making it a very lucrative marijuana penny stock that could positively surprise investors in 2018.
I’m partly hopeful of OrganiGram stock because of its unique position in its small local market of New Brunswick. Yet I must warn my readers that my bullish take on OrganiGram is also partly conditional on its acquisition by a major player or its merger with another smaller but significant player in the marijuana industry. Since this trade may be highly speculative, it’s best that you exercise caution.
That said, marijuana stocks are setting up for a big year in 2018 and this marijuana penny stock is certainly worth a second look.