My first purchase of 2018. It didn’t take me too long for the first purchase, even though I was hoping to wait until things cool down a bit. However, when dealing with a high momentum sector, its better to “go with the flow” instead of sitting on the sidelines and regret missed opportunities.
I decided to put more money into the marijuana sector (again) with a new position in my portfolio. I bought 300 shares in CannaRoyalty Corp (CRZ.C) @ CAD$4.60.
Recent Buy Decision
- California exposure: California is the 6th largest economy of the world if it were a separate nation and has ~40M residents. Medicinal use has been legal for a while, but the recreational use should send the pot sales through the roof in a state with that potential. Most projections put the number around $5-6B in annual sales by 2021. Even if we assume the projects are too rosy and halve that expectation to $2-3B, thats a significant number. It is no wonder that most observers agree that California is going to be the world’s largest pot market. Suffice it to say, I want a piece of the pie
- Canadian weed companies seem to be focused on the Canadian market, while a few are looking internationally such as EU, Australia, Africa etc. Because pot is illegal at the federal level in the US, most companies do not want to foray into this market until there is more clarification. While this is a prudent thing to do from a business perspective, I think there is a case to be made for companies that have a first-mover advantage, who are building a moat by acquiring assets and building a brand name/familiarity with the customers.This is where CannaRoyalty comes into play. CannaRoyalty is an outlier in the Canadian weedstock sector that is focusing on the US market. To put things into perspective with my previous bullet of market share, all of Canada is expected to be a $3.7B market in 2021 vs. California expected to be a $6B market in 2021.
- The Canadian companies have become the world leaders in building weed businesses and the assets for growth and distribution, as the legislation has supported the industry to thrive (on track for legal rec use by Jul 2018 federally in Canada). As a result, there is immense momentum going for the sector. Recently, the second marijuana ETF was launched, this time in the US (Canada has one ETF already and a second junior ETF in the works), and most of the holdings include Canadian companies. The listing of US ETF has already seen a lot of pent up demand from American investors driving a lot of cash inflow in these companies. Note that CRZ is not a holding in this ETF at the time of this writing…however, I would not be surprised to see the company added in the coming months.
- Business model: The company is building a big portfolio of strategic manufacturing partners and more importantly controls the distribution assets to the clients, via the CR Brands. The company also has royalty agreements in place, which should provide a good cash flow.
- The company has good geographical exposure including 6 US states (CA, WA, OR, AR, FL, NV), Canada, and Puerto Rico.
- CannaRoyalty is still a small player with a market cap of $200M, but due to the business moat they are building with the partnerships, and the distribution channels they will control, I believe this company will be much more valuable in the coming months.
- For more details, see the CannaRoyalty Corp Presentation.
What do you think of this purchase? Leave a comment below.
Full Disclosure: Long CRZ.C. Our full list of holdings is available here.
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