Heading South Of The Border

Written by Adam English
Posted December 11, 2018 at 1:10PM

I’ve been thinking a lot about Mexico.

Warm beaches away from the cold weather sound great and I can’t help but let thoughts of them creep in, but I’m thinking about business.

Namely, the business of selling marijuana, and how to invest in the next big thing in the marijuana sector.

A lot has been happening on the legalization front in recent months, and I think that Mexico may very well become a major example of what’s to come in the maturing sector.

Kind Of A Big Deal

If you haven’t been paying attention, a couple developments rapidly pushed full legalization forward.

Marijuana has been decriminalized in small amounts for years now. Medical marijuana laws are on the books, provided it doesn’t come in the form of edibles or contain more than 1% THC.

The first big development was a ruling by the Supreme Court that an absolute ban on recreational use was unconstitutional. Joining several other similar rulings, it creates a precedent other Mexican courts will have to follow.

The second is the overwhelming electoral win of Andres Manuel Lopez Obrador and the left-leaning coalition he leads.

President Obrador has promised major changes to Mexico’s approach to the war on drugs, while Interior Minister Olga Sanchez plans to send a bill to Congress that would allow recreational use of marijuana in the country.

The final version may end up very different, but the proposed legislation would allow companies to grow and sell marijuana while individuals can grow up to 480 grams per year.

This is a very big deal. Bigger than many would realize.

To put this in perspective, Mexico’s population is three times larger than California’s, and about 3.5 times larger than Canada’s.

Entering An International Market

Now that we’re past the Canadian legalization process, it is a bit hard to remember exactly how much everything changed between the election of a pro-legalization executive and coalition and implementation.

From October 2015, when PM Trudeau was elected, until mid-October of this year, the Canadian marijuana sector — or at least the Canadian Marijuana Index — grew tenfold.

The largest company to exist over that timeframe — Canopy Growth — went from C$1.81 to C$65.76, a 3,500% gain.

However, there were no major companies in the space, and certainly nothing of an international market.

That has changed in a major way. As Mexico legalizes, its domestic companies will enter a market where Canadian companies are already exporting to a bunch of other countries. They won't be able to compete on scale or price.

Faced with the incredible problems of establishing a regulatory environment and agency, many countries that are relaxing medical marijuana rules are instead looking to take the much easier route of importing large amounts from Canada. I expect Mexico to be tempted to do the same.

This is adding a massive boost to what otherwise would have been a steady process of consolidation in the sector.

The Next Big Trend

We’ve seen some big acquisitions and equity stakes in recent months. Warren Buffett, Altria, Coca-Cola, Heineken, and Molson are pouring billions into cannabis.

And the timing isn’t coincidental. These deals are going through because major companies expect to have a global reach.

They are betting on a massive increase in the total market and to have the size and capacity to capture as much of it as possible.

Mexico is going to be the next big prize, and all of the major players will be looking to take advantage of the situation.

It’ll be the first major market that will see intense pressure from international businesses to enter it from day one.

We haven’t seen anything like it yet, but it will become the new norm. In order to compete, these companies need to consolidate now.

The race is already on. A wave of buyouts is already underway, and investors that are holding the right stocks are poised to make huge profits.

Keep an eye on Mexico as it legalizes, and get positioned in some of the best buyout targets in the sector. The game is changing, and we need to change with it.

Take care,

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Adam English

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Adam's editorial talents and analysis drew the attention of senior editors at Outsider Club, which he joined in mid-2012. While he has acquired years of hands-on experience in the editorial room by working side by side with ex-brokers, options floor traders, and financial advisors, he is acutely aware of the challenges faced by retail investors after starting at the ground floor in the financial publishing field. For more on Adam, check out his editor's page

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