In a new book, a cannabis portfolio manager argues for the supremacy of investing in the US cannabis arena over its Canadian sibling.
Dan Ahrens, chief operating officer and portfolio manager at AdvisorShares, directly manages the AdvisorShares Pure Cannabis ETF (ARCA:YOLO) and the recently launched AdvisorShares Pure US Cannabis ETF (ARCA:MSOS), which offers exposure to US-based multi-state operators. His book “Investing in Cannabis: The Next Great Investment Opportunity” was published in October.
Ahrens previously told the Investing News Network (INN) that it’s confusing for him when Canada-based public companies get attention in the markets when news about US policy advancements comes up. In his opinion, this news doesn’t apply to Canadians entities.
“The US is a much bigger market, a much better market, and now this year the US market is performing a lot better than most of the Canadian market,” Ahrens said. The portfolio manager added that he routinely underweights the biggest Canadian names available in his fund as a management tactic.
In his book, Ahrens explores the story of cannabis investments and prepares investors for the current successes capturing the attention of the market — as well as those not so lucky.
Here INN presents an exclusive excerpt on the insights Ahrens shares in his new book, published by Wiley. The following excerpt is from Chapter 6 of the book, titled “Canada Versus the United States.”
“Investing in Cannabis: The Next Great Investment Opportunity” is available online and wherever books are sold in paperback and digital editions.
The United States
The US cannabis market is the largest in the world. Legal cannabis sales in the United States increased to approximately $13 billion in 2019, up from only $10 billion in 2018. That’s a 30% increase year over year. And it is already more than 10 times the size of Canada’s cannabis market. These numbers are only based on existing recreational and medical marijuana legal states through 2019. Remember that many states get a zero for legal cannabis sales. Wall Street estimates vary considerably, but it is felt that legalization in all states would create a $50 billion market. One analyst suggested that $100 billion in annual cannabis sales could be possible in the United States by the year 2030. For everything that the US market has, it lacks Canada’s most powerful virtue – federal legalization and everything that comes along with it. Cannabis companies in the United States (the multi-state operators), while representing billions of dollars in sales, cannot list their shares on the New York Stock Exchange, or NASDAQ, or even Canada’s TSX or TSXV. The US-based MSOs that are publicly traded have typically listed their stocks on the smaller Canadian Stock Exchange (CSE), and then had their shares also trade in the US over-the-counter (OTC) market. Stocks not listed on the major exchanges are at least less attractive to most investors. In other cases, these stocks are completely impossible to trade – depending on a brokerage firm’s or custodian bank’s rules. US cannabis companies also won’t get investments from big pharma, big tobacco, or major alcohol corporations. Deals similar to that of Constellation Brands and Altria won’t happen with American cannabis multi-state operators while the US federal law disconnect remains.
While marijuana remains illegal in the United States at a federal level, serious financing concerns remain for US marijuana companies. Banks and credit unions have avoided providing even basic banking services to cannabis businesses that “touch the plant” as well as companies that service marijuana businesses as their primary function. Banking for cannabis companies in the United States is not a gray area. Banks in the United States are federally chartered and would actually be exposing themselves to severe criminal and financial penalties for transacting with marijuana related businesses. US cannabis firms lack access to commercial banks, but they also lack access to investment banks. Large US investment banks would usually bend over backwards to underwrite deals for public corporations with sales in the billions and growing, but federally illegal cannabis companies are off limits. US cannabis firms in need of working capital have been forced to be creative in their financing, often turning to real estate sale-leasebacks or the issuance of more shares. As one of the few ways a cannabis company can raise cash, in a sale-leaseback a cannabis company sells its valuable real estate in a cash transaction combined with a long-term deal to lease the property back from the buyer. It is a better option than issuing more shares of stock. When a cannabis company in a cash crunch needs to raise capital and issue additional shares of its stock, existing shareholder value gets diluted and the stock price almost always suffers. Financing options for US cannabis companies are quite limited while the federal ban on marijuana remains.
While state-legal US cannabis sales greatly exceed those in Canada, high tax rates in the United States do hinder sales. Even while leading the world in legal sales, California sets the bar for excessive taxes hindering marijuana sales growth. California has an already high state sales tax. Combined with local tax, wholesale tax, and a 15% excise tax, consumers may pay more than 45% extra in their final product sales price. Other overhead expenses, such as laboratory quality testing, are also being added to retail marijuana prices. Black-market marijuana still dominates the California landscape. In California and all states, the legal market can only cut into the illicit market at a slow pace. Federal law in the United States also means US operators must have completely redundant operations in each legal state where they are licensed. Thus, the term “multi-state operators.” Companies are not permitted to bring cannabis and cannabis-derived products across state lines. Marijuana must be grown, sold, and used all within the state boundaries. While on the surface, US companies being forced to exist with separate operations in each state may seem like a big disadvantage, it’s not necessarily so. It is a major hassle though. Unlike in Canada where the majority of distribution and retail operations for recreational cannabis sales are monopolized by their provincial liquor boards, there is no state intervention in the supply chain for the US MSOs. In the United States, the supply chain of a company is owned by that company. They create, distribute, and sell their own products. True vertical integration exists in most states. Middlemen are removed. Many state regulators – like those in Florida, Arizona, New York, New Jersey, and Maine – even require licensees to be vertically integrated. Vertical integration translates into higher margin capture for US operators as compared to the Canadian licensed producers. With the ability to vertically integrate, the system in the United States simply positions the multi-state operators for higher profitability on average than Canadian LPs and their cumbersome government-heavy retail system.
Quality of Product
With more than 20 years of legal cannabis growing experience, operators in the United States of America have earned the reputation of creating the best marijuana product in the world. California cannabis is widely regarded as among the highest in quality. Humboldt County, California, in particular is famous for legendary cannabis strains. Cultivators have been developing legal marijuana products since 1996 (and illegal even longer). It’s all about high-quality genetics and scientific growth. US multi-state operators have mastered the science of large-scale grow operations, and state-legal cannabis cultivation is highly regulated for quality and safety. Operators in the United States are also world leaders with innovations in oils, topicals, and edible forms of cannabis product. The United States has been doing it for decades. Canada is just getting started with their late to the game cannabis 2.0 rollout.
While operators in the United States may have among the best technology, genetics, growing conditions and product innovation in the world, they remain completely restrained by US federal law. Cannabis from US operators would be in very high demand around the world if not for the regulatory overhang confining cannabis production and sales on a state-by-state basis. While cannabis remains illegal at a US federal level, growers are unable to ship their products to other countries or even other American states that have legalized marihuana product sales. If the restriction on out-of-state shipping – and international shipping – of marijuana products were lifted, the cannabis industry in the United States could simply explode and fully dominate the worldwide cannabis landscape. For now, it remains by far the world’s largest cannabis economy even while confined to its individual states’ boundaries. The US cannabis industry has its hurdles, but the fact remains that even the current US market is many times the size of that in Canada. And the US market’s publicly traded cannabis stocks seem dramatically undervalued in comparison to their neighbors in the North. With US cannabis operators’ banking, fundraising, and state-specific operating constraints, they have been forced, on average, to operate in a more efficient and profit-focused manner.
The single state of California is a larger cannabis market than the entirety of Canada. Even the smaller state of Colorado sells more cannabis annually than Canada. And Colorado, like California, has been growing and selling marijuana a lot longer than Canada has. There are currently at least 33 states with some form of legal access to cannabis. Eleven of those states have a combined recreational use and medical marijuana program. The other 22 states allow medical marijuana only, although many are considering the expansion into adult-use recreational sales. Many additional states have legalized the use of CBD products only – so far.
Don’t forget to follow us @INN_Cannabis for real-time updates!
Securities Disclosure: I, Bryan Mc Govern, hold no direct investment interest in any company mentioned in this article.
Editorial Disclosure: The Investing News Network does not guarantee the accuracy or thoroughness of the information reported in the interviews it conducts. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence.
Glimmer of hope for investment in Europe: EY survey – TheChronicleHerald.ca
By Mark John
LONDON (Reuters) – Global executives see a smaller hit to their investment plans for Europe than they did earlier this year and are somewhat more upbeat about the continent’s future appeal, a questionnaire by professional services group EY found.
The survey, conducted in October before a series of COVID-19 vaccine trial breakthroughs, showed that 42% of executives now expect a decrease in their 2020 investment plans and 31% plan to delay them to 2021.
That compared with 66% who expected decreases and 23% who saw delays when asked the same question back in April. This time around, a small number – 10% – even saw an increase to their 2020 investments, something no one did in April.
While that still means a big overall hit to foreign direct investment after 2019’s record year, EY noted that 21% of those surveyed believed Europe would be more attractive for investment post-Covid compared to just 8% in April.
“It is promising that investors believe that over the next three years, Europe will become a much more attractive destination for investments than before pandemic,” EY Area Managing Partner Julie Teigland said.
The findings were based on interviews with 109 global executives across 14 industries in October.
Upbeat news from vaccine trials are starting to support economic sentiment. The monthly eurozone Purchase Managers Index (PMI) for November saw a rise in its “future output” component in November to its highest level since February.
Among the other takeaways from the EY survey, 63% expected faster roll-out of digital customer access to surveys in the next three years (versus 55% in April) but only 37% now saw a reversal of globalisation (versus 56%).
(Reporting by Mark John, editing by Ed Osmond)
Digital Technologies have a strong return on investment, survey says – JWN
Canada’s oil and gas industry says investing in digital oilfield technologies can generate a strong return on investment even in today’s difficult market, according to a survey of industry professionals conducted as part of the Daily Oil Bulletin’s 2020 Digital Oilfield Outlook Report.
The survey asked respondents to evaluate 11 key digital applications along three dimensions: return on investment, technology maturity, and the readiness for their organizations to adopt the technology. The applications represent how organizations use technology to deliver value.
At a time when many companies are in survival mode as they attempt to hang on until the pandemic-inspired collapse in demand for their products abates, return on investment takes on particular significance.
Evaporating cash flows have left many companies in no condition to make any investments, let alone those that don’t virtually guarantee positive short-term returns. Many survey respondents said the sense of risk-taking on new technologies – with the attitude they could fail fast and move on – has withered.
However, there was widespread recognition and consensus across industry groups (producers, midstream, OFS) and levels (CEO to analyst) that digital technologies in general have high return on investment with all 11 technology use cases believed to represent a return on investment compared to or higher than other uses of capital in the organization. This bodes well for digital oilfield technologies vying against other investment opportunities in difficult times – an indication they will pay for themselves more quickly than other forms of investment.
The use cases felt to deliver the greatest return on investment – Production Asset Optimization, Automated Production Asset Operations and Predictive Maintenance – play into that narrative for their ability to reliably cut costs and deliver efficiencies. As quickly maturing technologies, they can be delivered for relatively affordable investment with low risk.
Also of note was that Fleet Management, Remote Asset Monitoring and Field Productivity are amongst the most mature and best known, and have return on investment that is closest to other comparable uses of capital. They may have already produced considerable gains in recent years and be perceived to have reached a level of saturation that is more difficult to improve on. Conversely, Biometric Monitoring, at the bottom of the list, maybe seen as one of the least mature use cases from an industrial perspective and therefore considered a high investment risk in difficult times.
Attitudes toward the return on investment have shifted in the five years since the Daily Oil Bulletin’s first survey was conducted. In comparison to the results of the 2015 survey (in which some applications were not polled), there is much more confidence in return on investment from optimizing field workforces, with “remote” applications having seen the biggest jump in perceived return on investment. Of the eight comparable use cases, those that climbed the most in rank over the past five years were Remote Asset Operations, Remote Asset Inspection and Remote Asset Monitoring.
While it is a sign of shrinking workforces in the midst of a major downturn in the industry, it could also be an early indication of more to come as companies are forced to deal with the secondary crisis of the pandemic and the physical distancing that entails for employees. Indeed, “remote” has become a watchword in all sectors of the economy as workers have been forced to adjust to the new COVID-19 reality. The ability to remotely operate, inspect and monitor assets simplifies the physical distancing aspect of these activities even as it trims costs.
For more information, the Daily Oil Bulletin’s 2020 Digital Oilfield Outlook Report, sponsored by Amazon Web Services and Rackspace Technology, is available for download here.
Note: In terms of ROI, a score of three represents a return on investment comparable to other uses of capital, four is higher than other uses of capital, and five is much higher.
India Stymies Investment From Hong Kong Amid China Border Row – BNN
(Bloomberg) — India is subjecting foreign investment proposals from Hong Kong at par with China as part of a new policy that makes approval mandatory for plans from countries that share a land border, a person with the knowledge of the matter said.
Nearly 140 investment proposals valued at over $1.75 billion, mostly from China and Hong Kong — China’s special administrative region — have been put on hold pending scrutiny, the person said asking not to be identified citing rules on speaking to the media.
Amid a border stand off with China, the Indian government tightened rules for foreign direct investment from all nations sharing a land border, making scrutiny mandatory for such investments — a restriction that was earlier applicable only to Pakistan and Bangladesh.
The delays may complicate deal-making and impact the flow of capital from private equity firms and hedge funds, which often include investors domiciled in China or Hong Kong. This may starve Indian companies of investment in the midst of the pandemic-induced economic contraction.
The curbs also apply when the beneficial owner of the proposed investment is situated in any of India’s neighbors. A government panel constituted to approve these proposals is yet to decide on the rules including on beneficial ownership.
The trade and industry ministry spokesman didn’t immediately answer a call made to his mobile phone.
READ MORE: China Gained Ground on India During Bloody Summer in Himalayas
Tensions between the two giant Asian economies have been escalating since May. Twenty Indian soldiers and an unknown number of Chinese troops were killed in clashes along the Himalayan frontier earlier this year.
The military crisis is the worst since the two sides fought a war in 1962. India responded by banning Chinese apps, tightening visa rules for Chinese nationals and imposing curbs on companies from nations sharing a land border from bidding for government contracts.
Earlier last month, Foreign Minister Subrahmanyam Jaishankar had told Bloomberg News that trade with China can’t carry on in business-as-usual mode as long as there are unresolved issues along the border — a disputed 3,488-kilometer (2,167-mile) stretch known as the Line of Actual Control.
©2020 Bloomberg L.P.
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