How to buy pot in Ontario: A consumers guide to purchasing and using legal cannabis

How to buy pot in Ontario: A consumer\s guide to purchasing and using legal cannabis

: DEAR MR. PRESIDENT: One marijuana company has a bold strategy to save American cannabis producers from getting left in Canadas wake

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But a growing body of research suggests otherwise and that the drop in spending on alcohol could turn out to be quite large. A recent paper from economists Keaton Miller and Boyoung Seo found that the legalization of marijuana in Washington state in 2014 led to a 12% decline in alcohol demand. Similarly, when economists Michele Baggio, Alberto Chong, and Sungoh Kwon looked at store-level sales data across U.S. counties from 2006 to 2015, they found that, in states where medical marijuana was legalized, monthly alcohol sales were reduced by 12.4% relative to sales in other states.

Constellation Brands (NYSE:STZ) sounded the starting gun on the recent rally in marijuana stocks when it announced its blockbuster $4 billion investment in Canopy Growth Corporation (NYSE:CGC) on Aug. 15, giving it a 38% stake in the Canadian marijuana grower. The move signaled that large, deep-pocketed companies like Constellation, which manufactures and markets beer, wine, and spirits like Corona and Svedka vodka, see big potential in pot.

On the other hand, just because companies like Constellation and Molson Coors are hedging their bets doesnt mean that their cannabis investments will pay off. Even if the U.S. does move toward full legalization, the industry faces a thicket of regulatory issues as jurisdictions across the country weigh everything from distribution laws to water rights. It also is literally selling a product that grows like a weed. How far pot prices might fall with legalization, and how compressed profit margins might become, is another unknown.

Since then, marijuana stocks have gone bonkers, as Canopy, Tilray, Aurora Cannabis, Cronos Group, Aphria, and the ETFMG Alternative Harvest ETF all have jumped more than 50%.

The cannabis investing frenzy has reached a fever pitch. With recreational marijuana use becoming legal in Canada next Wednesday and legalization efforts in the U.S. making steady progress, it seems like everyone from former Speaker of the House John Boehner to singer Jimmy Buffett wants a piece of the action. Shares of marijuana companies have soared, startups are proliferating and, while there may be a great deal of money to be made, there may also be a great deal of money to be lost.

Meanwhile, Coca-Cola (NYSE:KO) has expressed interest in cannabis-based beverages, reportedly holding talks with Aurora Cannabis, and formerly unknown stocks like New Age Beverage Corp (NASDAQ:NBEV) and India Globalization Capital have skyrocketed by multiples on their own plans to launch CBD-infused beverages. With Canada set to legalize recreational pot on Oct. 17, its no surprise the sector is getting so much investor attention.

Thats why investors were so eager to hear Constellation Brands earnings call last week, as it marked the companys first opportunity to shed light on its massive marijuana investment and answer analysts questions on the subject. CEO Rob Sands had plenty of tasty nuggets for investors to chew on. Here are four quotes, in particular, that stood out on the call. 

The big concern for the alcohol industry is that, if people consume more marijuana as legalization proliferates, they will imbibe less. Evercore ISI analyst Robert Ottenstein worries that AB InBev is making a mistake and that, if it doesnt craft a plan to sell cannabis-infused beverages in Canada soon, it will miss an opportunity to make back the money it may lose on beer sales as legalization takes hold.

Plenty of estimates have been made by research firms and others on the potential size of the cannabis market, but none of those analysts have made the kind of bet that Constellation did on the space. Heres what Sands had to say about the opportunity in cannabis:

It is, in other words, exactly the type of high-risk situation in which retail investors would be better off as spectators rather than participants. But for companies in the business of selling those other social lubricants—beer, wine and liquor—the calculus is very different. For them, not investing in cannabis could turn out to be even riskier than investing in it.

With our focus on continuous growth, weve recognized the significant opportunity that the emerging cannabis space presents as potentially one of the significant global growth opportunities of the next decade… This [the $4 billion investment] will be the largest investment to date in the cannabis space, a market which is expected to reach more than $200 billion in retail sales globally within the next 15 years, and one that is opening up much more rapidly than originally anticipated.

Cowen analyst Vivien Azer surmises that Constellation may be better shielded from cannabis because of its exposure to Hispanic and female consumers—two groups for which cannabis adoption has been slower. But she also thinks cannabis ultimately poses a threat to Constellations beer sales and that the companys investment in Canopy will shield it.

If marijuana legalization progresses as advocates and investors hope it will, $200 billion in retail sales by 2033 doesnt seem unreasonable. By comparison, global sales of alcohol — which some see marijuana as a substitute for or a complement to — is projected to grow from annual global sales of $1.35 trillion in 2015 to $1.6 trillion in 2022, according to Allied Market Research. By comparison, the global tobacco market is estimated to generate $760 billion in annual sales, excluding China. Colorado alone saw $1.5 billion in marijuana sales last year, which would translate to $100 billion across North America if consumption were similar and it was legalized federally in the U.S.

There is disagreement over whether increased marijuana spending among consumers actually does lead them to cut back on drinking. On Constellations earnings call earlier this month, chief executive Robert Sands said, We see no evidence whatsoever, especially in the United States, in the legal states, of alcohol cannibalization.

Not surprisingly, Canopy Growth stock has skyrocketed since Constellation made its initial investment last year, as shares are up nearly 400% from a year ago. CEO Sands took time in the earnings call to explain why the company had so much confidence in Canopy Growth and why it sees it as the market leader. Heres what he had to say:

Others have passed so far. Diageo chief executive Ivan Menezes said in July that his company is tracking developments very closely. Budweiser brewer Anheuser-Busch InBev noted in a statement that it is closely following the legalization trends in the cannabis industry in North America.

Canopy Growth has the largest legal cannabis production footprint in the world and in Canada, and they are the only producer currently participating in all Canadian provinces. They also have been awarded approximately 35% of the supply contracts announced throughout all Canadian provinces to date that are dedicated to recreational cannabis, a market that will become legal in Canada later this month. Going forward, we will be working exclusively with Canopy, as we believe that having a single platform to address all markets and formats globally is essential to winning in this space.

The problem would be compounded if legalization efforts in the far more populous U.S. continue to gain momentum. In a Gallup survey last year, 64% of respondents said that they favored making marijuana use legal. That compared to 46% in 2010 and 31% in 2000.

Sands went on to explain that those supply contracts should give Canopy billions in annual revenue once recreational pot becomes legal in Canada on Oct. 17. Projections for first-year sales are between $5 billion and $7 billion in revenue for the first year, which should give Canopy around $2 billion in revenue, considering it has about one-third of the supply contracts.

Nor does anybody know who the eventual winners will be. Marijuana isnt especially complicated to grow. Neither new entrants nor do-it-yourselfers face significant barriers.

One concern about marijuana legalization, especially for alcohol companies, has been cannibalization. Investors and others have feared that legal pot would cause alcohol consumption to decline as consumers would have another recreational drug to choose from. However, Constellation hasnt seen any evidence to indicate that legal marijuana is stealing sales from alcohol. Heres Sands on the matter:

The ultimate risk to alcohol producers is that, regardless of whether they opt to put money into cannabis or stay away, they could end up losing money.

We see no evidence whatsoever, especially in the United States in the legal states, of alcohol cannibalization. So, Id say as we sit here right now and we think about the cannabis business and our position in the cannabis business, its probably going to be close to 100% incremental for us, talking about incrementality. So, this conversation comes up a lot. Two things, OK? Number one, is it a defensive move? The answer is no. Were not playing defense, were playing offense. This is an offensive move, period.

That conclusion should reassure alcohol investors, but its also good news for marijuana investors, as it means that alcohol companies could give up or at least mitigate their historical opposition to national legalization of pot, as they have seen it as a threat to their business for a long time. Additionally, investments by Constellation and Molson Coors in marijuana companies indicate that beer makers and others see potential in pot.

Towards the end of the earnings call, Sands once again touted Constellations strong position in the evolving marijuana industry and its investment in Canopy, as well as expertise in marketing, distribution, and beverages. The stock could be a hidden winner in the marijuana boom after the market pooh-poohed its tie-up with Canopy, sending the stock lower. This is how Sands sees it developing:

So, we think that were by far the best company in the world, or in the best position in the world of any company to capitalize on what is absolutely without a doubt going to be a huge market over the next 10 years. Hundreds of billions of dollars. So, were addressing our position on every front, meaning that we need to be a key player in the development of the science. Thats really important. Branding, weve got top people and top agencies and firms working on branding, because like all businesses of this nature and consumer products, branding is gonna be the key to success in the future.

The marijuana market is evolving faster than most expected, and Constellations partnership with Canopy has quickly gone from a joint venture to test beverages to a multibillion-dollar deal that gives Constellation the opportunity to take majority ownership of the company through warrants. 

With Sands company now the biggest marijuana investor in the world, individual marijuana investors will want to pay close attention to his assessment of the market. Stay tuned, especially with Canadian legalization right around the corner.

Jeremy Bowman owns shares of ETFMG Alternative Harvest ETF. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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