If it seems like there's been a spurt of deals and potential deals going on in the cannabis industry lately, it's because that's exactly what's happening.
Canopy Growth Corporation (NASDAQOTH: TWMJF) scored what was probably the most highly publicized deal with large beverage company Constellation Brands (NYSE: STZ) buying a 9.9% stake in the Canadian marijuana grower for $245 million. But Canopy has also forged other agreements with smaller companies both before and after the Constellation partnership.
Continue Reading Below
More recently, Aurora Cannabis (NASDAQOTH: ACBFF) launched a takeover bid for CanniMed Therapeutics. Aurora had wanted CanniMed's board of directors to agree to an acquisition proposal made last week. When the board failed to respond, Aurora moved forward with its unsolicited takeover attempt.
Major deal-making in the cannabis industry is hitting an all-time high. Here are three ways it impacts not just the parties involved but marijuana stocks in general.
1. Acceptance of the cannabis industry
While it's true that more people have accepted legalization of both medical and recreational marijuana than ever before, the cannabis industry hasn't entirely been viewed as part of the mainstream economy in the past. I think Constellation Brands' partnership with and investment in Canopy Growth changes that significantly.
Constellation Brands isn't a small fish in the pond. The company is a member of the S&P 500 and has a market cap of $43 billion. Its decision to partner with Canopy Growth amounted to an endorsement of the cannabis industry -- at least in Canada. However, Constellation's move could also lead to greater acceptance of the cannabis industry in the U.S.
The company's CEO, Rob Sands, said in an interview with The Wall Street Journal, that Constellation thinks that legalization of recreational marijuana in the U.S. is "highly likely, given what's happened at the state level." Although Constellation Brands is echoing the stance taken by Canopy Growth of only selling marijuana in markets where it's legal at a federal level, the prospects of future legalization throughout the U.S. can only be helped by a major company like Constellation making a big investment in a marijuana grower.
2. Acceleration of more deal-making
There have been plenty of deals that haven't received quite as much attention as Constellation's investment in Canopy Growth and Aurora Cannabis' takeover attempt of CanniMed. For example, Canopy Growth recently acquired small Canadian medical marijuana grower TerrAscend. Earlier this month, Aurora increased its stake in Hempco Food and Fiber to more than 50%.
There's something of a "me, too" factor when mergers and acquisitions activity picks up. Companies that haven't been making big deals can be spurred to action in fear of missing out.
Canopy Growth is currently the biggest marijuana grower in Canada. I have no doubt that its size made a difference in Constellation Brands choosing Canopy Growth as a partner. But Aurora Cannabis could become the largest marijuana grower (at least in terms of market cap) if its attempt to buy CanniMed is successful.
Just imagine what's going through the minds of the executives running other major marijuana growers in Canada. If you're the CEO of MedReleaf (NASDAQOTH: MEDFF) or Aphria (NASDAQOTH: APHQF), you have to at least be thinking about making some deals of your own.
In fact, MedReleaf recently announced a stock offering that will generate $100.5 million. What will this money be used for? The company intends "to finance the acquisition and/or construction of additional cannabis production and manufacturing facilities in Canada as well as in other jurisdictions with federal legal cannabis markets." In other words, expect an acceleration of deal-making in the cannabis industry.
3. Attraction of more investors
My view is that deal-making in any industry attracts more investors to stocks in that industry. I see it happen frequently in the bopharmaceutical world, where the possibility of mergers and buyouts tends to bring some individual investors off the sidelines. I suspect that's what is happening already and will only pick up in the months ahead.
There are several factors that could contribute to this. Size matters for many investors who are leery of putting their money into companies that are small. Deals also make headlines, and therefore bring the involved stocks to the attention of more investors.
Another key reason why I suspect the recent deals for marijuana stocks could attract more investors is the bandwagon effect. That's especially applicable with Constellation Brands' investment in Canopy Growth. Some individual investors are likely to think, "If a big company like Constellation thinks it's a good investment, it probably is a good investment." I'm not saying that line of thinking is necessarily correct, but I'd bet plenty of people have similar thoughts.
Adding it all up
So what does all of this mean for marijuana stocks in general? It should be good news.
Smaller companies could find themselves takeover targets of somewhat larger companies, just like the situation with CanniMed and Aurora Cannabis. Relatively larger companies like Aurora, Aphria, and MedReleaf could attract the attention of other alcoholic beverage makers not wanting to be left behind by Constellation Brands in a potential cannabis-infused beer market.
I think these and other Canadian marijuana stocks should go higher in the coming months. This won't be driven entirely by mergers and acquisitions, though. Legalization of recreational marijuana in Canada in 2018 will be the biggest catalyst.
At the same time, investors shouldn't throw out all the traditional rules of investing in stocks. Look at the underlying businesses, growth prospects, and valuations before investing in any stock. After all, the most important deal is the one that requires you to put your own hard-earned money at stake.
10 stocks we like better than Aurora Cannabis Inc.When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*
David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and Aurora Cannabis Inc. wasn't one of them! That's right -- they think these 10 stocks are even better buys.
Click here to learn about these picks!
*Stock Advisor returns as of November 6, 2017