This summer had cannabis stocks baked, and not in a good way. Overall market turmoil linked to global trade battles did not help the sector, and pot stocks got slammed by certain company scandals, regulatory whiplash, and a decline in enthusiasm among investors who had gotten in on the upswing without understanding the substance of cannabis consumption and production trends. Autumn is just around the corner, and after a purge of bad execs and ignorant investors, the wise will turn to solid companies who capitalize on a handful of key industry drivers.
A Trump Pump?
There are many wild cards in DC, top among them in the Oval Office, or wherever he is sitting that day. Trump giveth and taketh away within the span of a tweet or two, but his self-interested motivation is reliable. If he sees loosening opposition to cannabis at the federal level as a cheap win with the anti-establishment types in the 2020 election, he will go for it. Companies that would capitalize on a Trump-led initiative to mainstream marijuana include Red White & Bloom (CSE: RWB – IPO September 2019), Curaleaf Holdings (CSE: CURA) (OTCQX: CURLF), and Trulieve Cannabis (CSE: TRUL) (OTCQX: TCNNF).
Legalization 2.0 = Branded Consumables in Canada
A spoonful of sugar helps the medicine go down–so does a brownie, cookie, gummy, or flavour shot. Product innovation is running full steam in companies across the cannabis industry, with labs and kitchens that look like your favourite cable or Netflix food competition show, and droves of customers waiting to try the new varieties that come out of the testing environment. As anyone who ever chewed a Flintstones vitamin knows, flavour and ease of administration helps with adherence to health-related ingestible. That holds true for cannabis products, and of course, unlike kids’ vitamins, raised eyebrows and heightened regulatory scrutiny come into play when there’s an inkling of risk that kids will want an adult product because of its flavour.
Cannabis companies are not taking chances and are tightly controlling distribution and labelling of edibles and other consumables, but they will engage a broader, non-smoking consumer base on a more detailed level. From an investor standpoint, product innovation will also rope in many traditional CPG (consumer packaged goods) investors who know how to recognize a winning market segmentation and sales approach. Companies with vibrant product innovation teams include Organigram Holdings (TSX: OGI) (NASDAQ: OGI), Aleafia Health Inc. (TSX: ALEF) (OTCQX: ALEAF), Cronos Group (TSX: CRON) (NASDAQ: CRON), Canopy Growth (TSX: WEED) (NYSE: CGC), and Aurora Cannabis (TSX: ACB) (NYSE: ACB). These companies will now enjoy higher margins than with previously approved flower, oil, and tincture products.
Want to sell stuff? Want people to know what you sell? Try putting it on a shelf, in a building! Yes, this seems like antiquated logic in 2019, but just like people like taking a vinyl LP out of a sleeve and putting it on a turntable, cannabis consumers like the analog experience of talking to experts and handling product. Canada, ever-advanced in its regulations and facilitation of the cannabis industry, is essentially raffling off store licenses for physical retail. Online sales will continue to be tricky even in the most liberal markets, so it’s good news for listed Canadian companies to get more shelf space within their own country as they wait to do business legally in the US.
Fewer Soap Operas
For a maturing industry, cannabis seemed like an adolescent drama this summer. There was trouble at the top in several key companies ranging from Canopy’s firing of CEO Bruce Linton after their disappointing earnings to CannTrust’s (TSX: TRST) (NYSE: CTST) serious Health Canada violations and Namaste’s (TSXV: N) (OTCQB: NXTTF) public clash in the C-suite. Also, late last year, Aphria (TSX: APHA) (NYSE: APHA) had its LATAM scandal play out in the media for all to see. Investors and boards voiced their distaste and replaced the bad actors, so here’s hoping the purge and new faces lead to better decisions and less nonsense.
Clarity on U.S. Regulations Could Finally Open the Floodgates
The Hurricane Dorian “Sharpie” saga about a storm that may have spared or never even headed for Alabama should remind cannabis market watchers of Alabama’s pivotal role as a key base of support for Donald Trump and the lifelong base of Jeff Sessions—early Trump supporter, later attorney general, and always opponent of any form of common sense federal approach to cannabis. There could and should be a levelling of federal and state regulation in the United States that will allow the lessons and innovations of Canadian operations to be brought to reality at scale in the world’s largest economy. Washington’s best efforts to ignore reality will finally run out of fuel eventually and succumb to the forces of cannabis capitalism.
Move Over Curaleaf, There’s a New MSO in Town and it’s Set to Hit The Street This September
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Disclaimer: The Cannabis Investor owns a position in RWB.