Canada is Going to Pot

by JDH on May 5, 2018

I don’t use marijuana.  Never have.  But now that it is very likely that by the summer Canada will become the first G8 country to legalize pot, so whether you smoke it or not, there is an opportunity to play pot for profit.

As an aside, I make no moral judgments on pot.  The fact that I don’t use it doesn’t change the investment thesis.  In Canada alcohol is legal, and you can easily make the argument that alcohol is more dangerous than marijuana.  Caffeine is legal.  Crappy food is legal.  I’m not your mother.  It’s not my job to decide what you should or should not consume.  My making marijuana legal we are letting the consumer decide, and that’s as it should be.

I have slowly added a few stocks to my portfolio, and currently the biggest pot producer in my portfolio is TGOD.TO – The Green Organic Dutchman.

I participated in a private placement early in 2017 at 50 cents a share, and then again late in 2017 at $1.65 per share, and then again in the IPO at $3.65 per share.  After an initial pop to $4.25, TGOD has settled in around the $3.90 range, which indicates that the IPO was appropriately priced.

Would I buy more today?

No, because I have my allocation.  If I wanted to take an initial position, I would probably place my initial buy order around the $3.75 level, in the hopes of catching it on weaknesses.

Those who participated in the IPO at $3.65 may see that it’s not going to pop to $10 anytime soon, so they may take some money off the table.  However, I don’t expect it to drop much below the IPO price, because a significant quantity of the outstanding shares are subject to a six month hold period (i.e. all shares from the previous two private placements can’t be sold for six months).

So why am I investing in a product I don’t use?

Because I think that the legalization of marijuana will be very similar to what happened at the end of Prohibition: demand will exceed supply, and than confers a first mover advantage.

Medical marijuana is legal in 29 US states, and eight states have made recreational use legal.  If the state next door has legalized it, and is making tax revenue from it, your state will also have to legalize it or else you lose out on a lot of free money.  So, I expect that within a very short period of time it will be legal everywhere.  When that happens, where will the supply come from?  The established producers.

One of those will be The Green Organic Dutchman.  Why TGOD?

First, it’s all organic.  They have state of the art greenhouses, so no pesticides.  That will be very important.

Second, licensing.  In Canada, you apply for a license for your property.  TGOD has 100 acres near Hamilton, Ontario, so they can expand production to fill those 100 acres without having to apply for any new licenses.  That’s a huge first mover advantage, and they also have 75 acres in Quebec, so they have room to grow.

Third, they have lots of cash, having just raised over $100 million in this IPO.  They can build out production with the cash on hand.

Fourth, they have strategic partners, including with Eaton Corporation (to manage their power systems), Ledcor for facility construction, and Aurora Larssen, the experts in high tech greenhouses.

Finally, Aurora Cannabis, the second largest pot company in the world, is a strategic investor.  They have already invested $75 million, and they have the right to buy 8% of TGOD 90 days after the IPO, and another 28% if other sales milestones are reached.  That would be a big investment for Aurora, and would increase the share price.

With the advent of many new Marijuana ETFs, TGOD will become a core holding, and that will also support the share price.

How high can it go, pardon the pun?

I have no idea, but my plan is to hold until June or July, by which time we will know that marijuana will be fully legal in Canada, so there will be nothing holding the price back.  At that point I will be selling my free trading shares, and riding the shares in lock up.

That’s the plan.

We’ll see how it goes.

Thanks for reading; see you next week.