Spreading geographically can ease risk for cannabis producers

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Investment Outlook

Geographic expansion can be a plus for cannabis stocks, especially when it helps offset the risks of our highly regulated industry.


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Cannabis producers have lots of risk factors: but one way to lower those risks is to cut their reliance on a single geographic area. That’s especially critical in a highly regulated market like marijuana where different levels of government have a big say in the growing and sale of their products.

Geographic diversification can involve making sure they have cross-Canada operations. For example, Hexo Corp. (symbol HEXO on Toronto) is a Canadian-based producer and distributor of medical cannabis with production facilities in Quebec. Currently, Hexo’s distribution of medical cannabis is through clinics with which it has agreements. It also sells through its online store. But to cut its risk, Hexo is now expanding across Canada. The company was also among the producers selected by the B.C. government to supply recreational cannabis to the province. It has also now entered into a supply agreement with the Ontario Cannabis Store—run by the provincial government. It also has supply agreements in Saskatchewan and Alberta.

Cannabis producers can also branch out internationally to broaden their geographic reach. A good example here is Canopy Growth (symbol WEED on Toronto). The company has announced subsidiaries, partnerships or business activities in Germany, Chile, Colombia, Denmark, Jamaica, Lesotho, Australia, Brazil, Czech Republic and Spain

Not all geographic expansion works out—especially when it it’s done through acquisitions, as is mostly the case with cannabis producers. A company can speed up its growth by buying other companies, rather than building on or duplicating its existing operations. But, while acquisitions speed growth, they also accumulate risk. After all, the seller of something always knows more about it than the buyer. When a company focuses on acquisitions for corporate growth—including geographically—it assumes it can out-perform the current management of what it buys. It assumes it can raise the return by a wide enough margin to increase its earnings, over and above the acquisition’s cost.

Sometimes that works out, sometimes it doesn’t. But when it does, it can help reduce risk, and enhance overall returns.

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