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fabrice taylor

Fabrice Taylor, CFA, publishes the President's Club investment letter. His letter and The Globe and Mail have a distribution agreement.

Marijuana, I am convinced, will be a big industry that will make lots of investors rich. It will make even more investors poor. If you want to be on the winning side of the bet, stick to quality. Pot smokers avoid "skunk" weed. Investors should avoid skunk companies.

This is not an easy business. It takes tremendous expertise. The Canadian Securities Administrators warned investors last week about fly-by-night firms in the sector: "There is no assurance that a company announcing its intent to enter the medical marijuana industry will be successful in … creating shareholder value."

The reason I think marijuana – and not just medicinal – will be big business is part statistics, part anecdote. Health Canada figures the medicinal business will reach $1.4-billion in a decade, roughly 10 times what it's worth today. I think that's conservative, because ever since weed became a respectable investment topic, users of the stuff are coming out of the woodwork, and they don't look like Garth from Wayne's World. They look like lawyers, portfolio managers, doctors, teachers and engineers.

What's particularly interesting is that while chronic pain is cited as the most common use of medical weed, the people who are confessing their use to me almost all use it to relieve stress and sleeplessness, major problems with our society.

If you agree with the thesis and want to stick with quality, your first look should be at Tweed Marijuana Inc., which has a market cap of $111-million.

Tweed is licensed. Few companies can make that claim. It also has a facility that meets Health Canada's strict security and quality demands. Tweed's management team is respectable, too. Despite all that, Tweed has stumbled somewhat trying to get its first batches to market, highlighting the challenges of this business. Still, it's the safest of the publicly traded firms.

Other licensed standouts planning on going public soon include Bedrocan Canada and Aphria.

Bedrocan is, in my view, best in class, thanks to its long experience and scientific expertise. It's a subsidiary of Dutch company Bedrocan BV, which runs the 13-year-old Dutch medicinal marijuana program and which is the only company in the world that can export marijuana internationally. Bedrocan BV is also the sole supplier to Germany, Finland, Italy and Norway.

Bedrocan's CEO, Marc Wayne, is the chair of the Canadian Medical Cannabis Industry Association and has an impressive résumé with excellent credentials. In fact, Bedrocan was invited by Health Canada to advise the government on the Canadian program. That long experience will likely mean a high-quality product and efficient production methods.

Aphria is a close second in my opinion, largely because it has excellent agricultural expertise and has attracted a very serious CEO in the form of Vic Neufeld, who ran Jamieson Laboratories, the vitamin maker, for 21 years before it was sold.

Aphria's founders have been growing flowers and vegetables in Southwestern Ontario greenhouses for 70 years. It looks like Aphria will have a notable cost advantage, too, which means it could wholesale to other licensed retailers who have higher costs. This is a benefit because the rules make it difficult to attract end customers. The wholesaler doesn't have that problem.

My pick for the most interesting speculation is Abattis Bioceuticals Corp. Although not yet licensed, it sets itself apart from the crowd with a vertical integration strategy that includes growing, selling, refining and even payment processing (U.S. banks are not interested in handling marijuana-related payments). What the management team lacks in medical marijuana experience, it makes up for with a clever, panoramic approach to the industry.

The stock, currently quoted at about 45 cents, popped over $2 when it appeared close to obtaining a licence. That put its valuation in line with Tweed's.

Weed is serious business. The important thing is to avoid the skunks.

Globe app users click for charts showing projected revenue growth of medicinal marijuana in Canada.

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