At the 2019 Toronto Money Show, we got a chance to listen to some experts give their opinions on cannabis investing
SmallCapPower | September 30, 2019: On Day Two of the 2019 Money Show Conference in Toronto, we got a chance to listen to the Cannabis Investing Panel. The panel featured executives from the U.S. and Canadian cannabis companies as well as portfolio managers. Panelists included: Robert Kelly, Director of Investor Relations at Aurora Cannabis Inc. (TSX:ACB), Michael Mills, CEO and President of Body and Mind Inc. (CSE:BAMM), Chris Rebentisch, Chief Executive Officer, Director at 1933 Industries Inc. (CSE:TGIF), Allan Rewark, Vice President Communications, Stakeholder Relations at Emerald Health Therapeutics, Inc. (TSXV:EMH), and Sean Brodick, Manager at Marijuana Millionaire Portfolio.
If you had $5,000 to invest would you put the money into Canadian cultivators or U.S. based multi-state operators? While the panelists did not give a specific answer as to which market is better, they did provide investors with some tips on what they should be looking out for when making an investment. The panelists mentioned to identify companies with brand equity, intellectual property (IP) and technology, distribution & supply chain, processing & extraction, and companies maintaining a high level of shelf-space in dispensaries. Vertical integration is expected to be important, as there used to be a belief in the West Coast states that trim would be easy to buy, however it now appears to be more difficult as vertically-integrated companies have been using their own trim. The panellists agreed that you need to look for companies that are operating with a laser-like focus and have a management team that is executing on their business goals.
Price compression happening in low-mid-range dried flower market, but not with premium flower. The panelists mentioned that investors should segment the cannabis market, from low quality to premium dried flower. Companies that are selling premium dried flower have been performing well and have been consistently selling out of their product. The Supreme Cannabis Company, Inc. (TSX:FIRE) is a good example of a cultivator that has had no problem selling its premium dried flower.
Branding is important but first-mover advantage does not necessarily translate into the top brand. The panelists mentioned that you just need to look to the California market to see evidence of this. There were some California black market brands that were expected to command high market share once legalization happened, but many of them ended up dying. Some companies are trying to operate under one brand, such as Curaleaf Holdings, Inc. (CSE:CURA) and Body and Mind, while other brands are trying to operate as a House of Brands, like Origin House (CSE:OH) and Acreage Holdings, Inc. (CSE:ACRG.U). It is still unclear which of the two strategies will ended up working in the long run. In Canada, branding is a whole different ball game as no branding is allowed, thus Canadian cultivators have to grow organically. In Canada, the budtenders and OCS buyers are the main points of contact with the consumer and should start hosting events to meet with cultivators to get better education on their branding. The panelists ended by mentioning that there is still not national brands yet and there is a huge opportunity for the company that becomes the first big brand.
Investor should be looking at companies with technology and intellectual property. Processing and extraction technology will be important to provide consumers with a consistent product. For example, if cannabis-infused gummies don’t taste the same as the previous package the consumer bought, then it is not a brand. The panelists mentioned to look to the consumer-packed goods (CPG) industry as an example. Coca-Cola does not own any bottling facilities; it owns the intellectual property and thus can squeeze good margins. The panelists mentioned that biosynthesis, growing cannabinoids in yeast cultures, is overplayed. Consumers don’t walk into a dispensary asking for synthesized cannabis. Research and development will be important, as there are over 113 cannabinoids and we only really know two of them well (THC and CBD). Panelists mentioned that for a big pharmaceutical player to enter the industry they are going to want to see IP, especially with the lesser-known cannabinoids.
Vaping epidemic overblown. The panelists mentioned that the vaping epidemic was overblown, and the deaths were likely not the result of cannabis. But instead, the result of an illegal thickening agent, Vitamin E acetate, which was added to the cannabis oil to thicken the vape, which allows the product to smoke better. Vitamin E acetate is an illegal thickening agent because it is heavy and sits in the lungs, blocking oxygen from entering the lung capillaries. This agent was most likely added because a manufacturer was trying to reduce their cost and likely did not know that the agent used would have a negative effect. The panelists mentioned that strong regulations, such as those enforced by Health Canada, should limit any negative effects from vaping. Health Canada requires rigorous testing of containments and vape products before they are approved for sale.
Disclosure: Neither the author nor his family own shares in any of the companies mentioned above.
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