How to Profit from Canadian Marijuana Stocks While Staying in the U.S.?

Canadian marijuana stocksScoring a Pot of Gold in Canada’s Green Rush

Picture this: over 15,000 miles away from Toronto, Canada, two men are cheering with bottles of champagne. Their wager on Canadian marijuana stocks has just hit a jackpot.

They are not alone. Many others have struck it rich overnight in this blossoming multi-billion-dollar industry. Canadian pot stocks in 2017 are the hottest talk of the town.

The pursuit of this pot of gold has been exceedingly rewarding for many. It’s obvious that this billion-dollar opportunity hasn’t missed the government’s eyes. Canada’s “bae,” Prime Minister Justin Trudeau wants his cut too.

It’s official that, following in the footsteps of Uruguay, Canada will become the second country in the world to legalize recreational marijuana and tax its legal sale.

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The Liberal government under Trudeau is expected to table the legalization bill later this month.

Pay attention to the timing, which couldn’t be more symbolic. Pot lovers are expecting the bill to be introduced on the eve of April 20 (4/20). Every year on this date, in several Canadian cities, large groups of marijuana fans congregate in public places to light up reefers and puff away.

This year, however, it won’t just be a rally to protest for marijuana legalization in Canada; it will likely be a celebration. Because, by next year, pot will probably be legal to possess, smoke, sell, and grow in Canada.

By the way, the two men cheering in my prologue are not imaginary. They are real. They are based in Sydney, Australia but, like many of us, they sought a share of Canada’s “green rush.” Whether it’s their investment acumen or sheer luck, their timely bets have paid off handsomely.

Ben Cleary and Craig Evans have just become the world’s best-performing hedge fund managers. Their fund has returned a stupendous 145%. Those kinds of returns are a rare sight. How did they do it? By investing in Canadian marijuana stocks. (Source: “Marijuana Helped the World’s Top Hedge Fund Gain 145%,” Bloomberg, March 2, 2017.)

Profit from Canadian Marijuana Companies

Canada’s love for pot is no secret. The country ranks among the top growers of cannabis. Despite its current illegality, some of the best-quality strains are cultivated there. In fact, it is also no secret that truckloads of the green grass flow past the 49th parallel every day. How do they dodge customs? We wish we knew.

The biggest twist in Canada’s marijuana story took place in the 1980s. Up until then, Canada was secretly importing pot. Shiploads would arrive stealthily from Thailand and Pakistan.

But then came the big turning point. Canadian drug laws became more lax. Mandatory jail sentences for trafficking drugs was dropped. This is when Canada’s marijuana industry really took off.

It was the perfect time to cultivate this crop and make a quick buck. In came the pot farmers in droves. In an agrarian economy, perfecting the art of growing and selling this grass was going to be as easy as pie.

This led to the “green rush.” Professional growers sprang up. They had their hands on all the popular strains. The greater the variety of strains they held, the bigger their clientele. 

In short, Canada’s “cannabis capitalism” was born. Canada was now “exporting” pot. Today, Canada’s marijuana landscape looks much more attractive than that of its southern neighbor.

In the U.S., about half of the country’s states allow marijuana use in some form, but only eight states permit recreational use. In Canada, however, medicinal marijuana is ubiquitously used, and penalties on recreational use remain small.

This is why tons of marijuana companies already exist in Canada, and many more are propping up ahead of legalization. The Wall Street hyenas will tell you it’s the best time to invest in Canadian marijuana stocks.

But is it?

Before I get to that, let me give you an idea of what the Canadian marijuana industry looks like at present.

When hunting for the best Canadian marijuana companies, you’ll be able to track down four kinds of companies active in this space.

  1. Companies that produce and sell marijuana.
  2. Companies that invest in real estate on which companies grow and sell marijuana.
  3. Companies that don’t produce marijuana, but are invested in marijuana’s medicinal properties.
  4. Service companies that make the flow of information easier in the marijuana industry.

If you’re planning to invest in any of these Canadian pot stocks, here are a few things you need to know first.

Investing in Canadian Pot Stocks from the U.S.

Buyers beware!

Trading Canadian cannabis stocks may rate higher on the difficulty scale than you realize. Many U.S. brokers don’t let you buy Canadian stocks, so you might have to open a new account with a brokerage that buys Canadian stocks.

The result is obvious: expect higher fees!

Then comes the tricky part of understanding the Canadian exchanges. It’s true, the exchange where the stock is trading will also determine your rewards.

Some of the top Canadian marijuana stocks are listed on the Toronto Stock Exchange (TSX or TSE) or its “Ventures” arm (TSXV). And yet, you’ll find many Canadian marijuana stocks that are instead listed on the Canadian Stock Exchange (CSE) or the Canadian Venture Exchange (CVE).

How does it matter? Let me break it down for you.

Companies listed on the TSX/TSXV generally receive more analyst and news coverage than those listed on the CSE or CVE. As a result, more people buy and sell on the TSX and TSXV.

In other words, these stocks will offer more liquidity than CSE stocks. This is also exactly why most of the stocks listed on CSE are penny stocks.

To put it simply, CSE-listed marijuana stocks will be the riskier bets of the two.

Take, for instance, these two micro-cap Canadian marijuana companies: Vancouver-based THC Biomed Intl Ltd (CVE:THC) and Hamilton-based Beleave Inc (CNSX:BE). Both are investing in the pot boom, and may seem like great opportunities on face value, but the high risk factor can’t be ruled out.

To be honest, I wouldn’t take the plunge here.

On the contrary, consider the four bigger, more renowned companies like Canopy Growth Corp (TSE:WEED, CVE:CGC), Aurora Cannabis Inc (CNSX:ACB), Aphria Inc (CVE:APH, TSE:APH), and OrganiGram Holdings Inc (CVE:OG, TSE:OGI).

They were all penny stocks until the cannabis bull market kicked in. Today, their relatively larger market capitalization awards them better visibility.

Should You Invest in Canadian Marijuana Stocks?

The answer to that depends on your risk tolerance. It’s true that, with greater risk, comes greater rewards. But miscalculated risks can land you in hot water.

The prices of these marijuana stocks skyrocketed after rumors of the legalization bill started making the rounds. Then came the much-dreaded correction. But once the rumors were confirmed, these stocks popped again. Today, it’s almost as if the herd has already moved in.

I’m not an economics expert, but I can put my finger on a bubble when I see one. You develop that foresightedness in my line of work.

Even if I set aside the theoretical assumptions of efficient markets and rational participants, I cannot ignore the fact that these stocks have priced in the market information on marijuana’s legalization. If you don’t believe me, just look at the pop in these stocks.

Triple-digit jumps in just four months either happen in dreams or in bubbles.

WEED stock chart

Chart courtesy of StockCharts.com

The Canadian government’s impending decision to legalize marijuana is public knowledge now.

Ask yourself: how far can these stocks go up on the back of this news alone?

Then there remains a final hitch. Once the Canadian federal government legalizes recreational marijuana, the decision then falls on the provincial governments. So don’t consider the legal status to be set in stone.

Notice how short interests in all of these stocks have spiked, and for good reason. Take, for instance, Canopy Growth, which is touted to be the biggest marijuana stock in the world. During this period, short interest in the stock has jumped 70%! 

It’s no secret that the underlying fundamentals of these companies do not support their current stock valuations. Does this sound like a bubble? Yes it does! A big green bubble!

If it bursts, the stocks could easily come crashing down. So, if you don’t hold a cushion in your portfolio to fall back on, you could end up hurting yourself.  

Bottom Line on Canadian Marijuana Stocks

Don’t get me wrong. I’m not against taking risks. Actually, Finance 101 says we are all inherently risk-averse. All I’m saying is that if you want to take a risk, take a calculated one. Herd mentality has killed many dreams of quick riches. It’s better to make your own way through this opportunity than to follow the herd.

Many of these Canadian cannabis stocks were selling for pennies before the dead cat bounced. So, once again, wait for a market correction before jumping on the bandwagon.

If I were you, I’d be keeping an eye out for those Canadian marijuana stocks that hold greater market visibility and are maintaining some room for triple-digit strides. (Hint: Aurora Cannabis!)

I can’t stress this enough: the market for marijuana stocks may be no less than lucrative, but one’s timing needs to be right. Plus, the best way to play risky bets like these is by using diversification. So ensure that you’re not putting all your eggs in one basket.

Nonetheless, it might be about time we put Canadian cannabis stocks on our watchlists, if not in our portfolios. Mark your calendars, my friends! July 1, 2018 is the expected date when Canada gives a green light to pot lovers.