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What Marijuana Market Leaders Canopy Growth, Cronos Group, and Aurora Cannabis Get Wrong (And Why They Could Lose Their Market-Leading Positions)

Stocks mentioned in this report: Canopy Growth (NYSE: CGC / TSX: WEED), Cronos Group (NASDAQ: CRON / TSX: CRON), Aurora Cannabis (NYC: ACB / TSX: ACB), Ionic Brands (OTC: IONKF / CSE: IONC), Invictus MD (OTCQX: IVITF / TSX-V: GENE), Origin House (OTC: ORHOF / CSE: OH), and Weekend Unlimited (OTC: WKULF/ CSE: POT)

Six years ago, marijuana was illegal throughout North America. Today you can buy pot for recreational use in 11 U.S. states and it is fully legal nationally north of the border in Canada, and for medical use in 33 out of 50 states in America.

In those six short years, the marijuana market has rocketed from zero to $12 billion.

Early-entry companies like Canopy Growth (NYSE: CGC / TSX: WEED), Cronos Group (NASDAQ: CRON /  TSX: CRON), and Aurora Cannabis (NYSE: ACB / TSX: ACB) rode that rocket to multi-billion dollar stock market valuations.

At its 2019 high in April, Canopy Growth boasted a market cap higher than the world’s biggest air carrier, American Airlines.[1] That is an astonishing achievement for a company only five years old.

Since that April high Canopy and other market leaders have taken a hit. CGC is down a whopping 44%. CRON is right behind them with a 35% loss, with ACB losing 42%.[2]

There’s talk that the cannabis stock boom might be over, but that’s totally ridiculous. Some of the world’s most reliable market analysts are calling for enormous continuing growth.

  • Global research firm Euromonitor sees a fast-paced 45% compound annual growth rate through 2025, bringing the market to $166 billion.[3]
  • Investment bank Piper Jaffray forecasts the market will soar to $500 billion.[4]
  • Investment firm CB1 Capital is predicting the market for legal weed could reach $1 trillion by 2029.[5]

The current cannabis stock slump is only temporary, the result of several factors including management missteps by a few companies and the general stock market downturns in May and again during the summer months of 2019.

In fact, cannabis stocks might be one of the few bright spots for investors as the economy trends towards possible recession.

But don’t bet on today’s leaders to hold onto their top positions.

 

Upheaval in the Cannabis Industry

Take a close look at the cannabis industry and you’ll see unmistakable signs of a maturing market.

When pot was first legalized, the market suffered with shortages. That drove up prices, which made pot a production lucrative enterprise.

Early producers like Canopy, Cronos, and Aurora (early entrants, becoming majors in the field) reaped the benefits of growing market hype and anticipated high prices to consumers, helping to explode to their enormous current market valuations.

Meanwhile, thousands of new growers sowed their seeds and reaped their harvests, increasing supply and erasing much of the market advantage that had been enjoyed early by the big producers.

In short, cannabis is now becoming nothing more than a commodity, much like corn, alfalfa or wheat.

Bloomberg News warns that cannabis producers “risk becoming little more than farmers.”[6]

Forbes advises that investing in producers “is like playing the end of alcohol prohibition by buying a hops farm.”[7]

For example, the average wholesale cost of cannabis in Colorado has dropped from nearly $3,500 per pound in 2014 to roughly $806 per pound in mid-2019  — a whopping 77% decline.[8][9]

In the state of Oregon, marijuana “trim” sells for as little as $50 per pound. Margins are now so low that some growers are being driven out of business.[10]

With U.S. anticipated federal legalization on the not too distant horizon, it’s reasonable to expect imports from other countries with low labor and resource costs to further erode prices, as well as the major producers that have a hold position like Canopy and other big producers have on the market.

Canopy and its peers are producers & growers first and foremost. Their business is growing and selling raw cannabis to consumers. And as retail pot prices are expected to plunge and become commoditized in the coming years, I expect… so will their revenues. This is in direct correlation to their ability to reach break even or profitability.

I might be wrong… but the current trend is for these leading cannabis companies to ultimately become a commodity-based business — unless these companies have something special to offer to the market, a unique branding proposition or have a scientific-based advantage!

Positioning, branding and the science behind cannabis is the next pivot to greater define and explain the upcoming market. Companies will need to back up industry claims with proven and scientific data to support the use of specific strains that can be applied to certain medical applications such as pain, epilepsy, anxiety and depression. These majors will be squeezed by a new, smarter kind of cannabis company that is emerging now as the market matures.

 

A New Kind of Cannabis Company Is Emerging

To see what is happening in the cannabis market, take a look at the cereal market.

Quaker Oats doesn’t own the fields of grain that ultimately make their way to your morning bowl of cereal. Anheuser-Busch doesn’t own the silos of barley that are brewed into the beer you enjoy after a hard day’s work.

Farming is a low-margin business. Quaker and Anheuser-Busch know the value of their products is not in their ingredients, but in their brands.

And that is exactly what is happening in the cannabis industry, and it’s happening right now! While companies like Canopy, Cronos, and Aurora are saddled with outdated producer (grow) business models, new companies are entering the market with their focus on strong branding.

 

 

Bloomberg says “While cannabis investors are distracted by seeds and crop yields,” there is “a more lucrative future in brand-building.”[11]

CNBC stock guru Jim Cramer predicted back in January that “2019 will be all about branding for the pot industry.”[12]

That prediction is being realized now as savvy consumers seek quality and consistency in their purchases and rely on trusted brands to deliver.

The companies that are gaining share of market now will emerge as leaders as cannabis sales grow to their predicted trillion-dollar size. Here are three to watch.

 

Three Stocks with Strong Cannabis Branding and Positioning

#1 Ionic Brands Corp. (OTC: IONKF / CSE: IONC)

Ionic is already the top cannabis oil producer in Washington, a success they are rolling out state-by-state. Cannabis oil commands higher prices per gram, and enjoys better operating margins than other forms of cannabis.

Building on their Washington success, Ionic entered the lucrative California and Oregon markets in 2018, and the trend-setting Nevada market in April 2019. Planned acquisitions in negotiation now could see the company’s brands rolled out to two more states before mid-2020.[13]

Upon entering the California market, Ionic quickly achieved a partnership with the country’s largest cannabis distributor, Origin House (OTC: ORHOF / CSE: OH). This gives Ionic access to more than 500 dispensaries in California, the world’s largest cannabis market, servicing a population of 38 million people in the state.

What’s more, in Washington Ionic owns the leading brand in the fastest growing market segment, vape pens. The method is rapidly becoming the most popular way to consume marijuana. As the New York Times says, “Nobody smokes marijuana anymore, everyone’s vaping it.”[14]

Now, with new distribution deals in California, Nevada, and Oregon, and with vaping expected to grow to $8 billion in sales in the next three years, Ionic’s vape pen sales could explode to many times its current $10.5 million in sales.

 

#2 Invictus MD (OTCQX: IVITF / TSX-V: GENE)

If you keep up with rock and roll, reality TV, Formula One racing, the bestseller lists, or any one of the 2,500 categories in which he has licensed his name and image, you know who Gene Simmons is.

His band, KISS, has more gold records than any other American band. His celebrity TV show, Gene Simmons Family Jewels, aired for eight seasons in 84 countries — one of the longest-running celebrity reality shows in history.

And now, Simmons is the voice and face of Invictus MD, a Canadian cannabis company that aims to use Mr. Simmons’ strong recognition factor to become the “Starbucks of Canada,” with a presence in every significant market.

One of the company’s brands is Acreage Pharms, a subsidiary that is positioned to serve Canada’s expanding need for high-quality cannabis oils. Acreage uses innovative CO2 oil extraction technologies that utilize high-pressure carbon dioxide to extract essential oils from botanicals. The process produces very high quality cannabis oils.[15]

 

#3 Weekend Unlimited (OTC: WKULF / CSE: POT)

The complex regulations and restrictions of the cannabis market can sink inexperienced entrepreneurs, or slow their development by years as they learn from their mistakes.

The founders of Weekend Unlimited, though, have already launched two successful cannabis companies and taken them public.[16]

Both of those previous companies are now revenue-generating, multi-market entities that trade on the Canadian stock exchange. The stock of one has paid investors 1,471% in gains since 2014.[17] The other has returned 138% since its launch in June of 2017.[18]

Weekend Unlimited’s strategy is to buy undervalued brands and provide them with the expertise and capital to grow into significant market forces. From its beginnings two years ago, the company has already made six such savvy acquisitions, creating a market presence that is far greater than most young cannabis companies.[19]

 

The Cannabis Boom Is Far from Over

Besides the whole of legalized Canada, two-thirds of U.S. states allow some form of cannabis use, either medical or recreational, and every year more states join the trend.

In the U.S., marijuana is bar none today’s fastest-growing market, rocketing from zero to $12 billion in six short years, and on its way to be $500 billion or even $1 trillion as soon as 2029.

Companies with strong branding are emerging as the new winners as the market gains maturity. Look to smart product marketers to deliver what could be your biggest profits over the next 12 months.

But remember, always do your own due diligence before investing in any stock.


Cynthia Berryman, Contributor
for Investors News Service

P.S. To discover more opportunities in the hottest sectors in North America, sign up now to the Financial News Now newsletter to get the latest updates and investment ideas directly in your inbox!

DISCLAIMER: Investing in any securities is highly speculative. Please be sure to always do your own due diligence before making any investment decisions. Read our full disclaimer here.

Published September 2019

Sources:

[1] https://moneyandmarkets.com/canopy-growth-cannabis-up-2139-percent/

[2] *As of 9/17/19

[3] https://blog.euromonitor.com/global-legal-cannabis-market-to-reach-us166-billion-by-2025/

[4] https://www.barrons.com/articles/marijuana-stocks-tilray-canopy-growth-upgraded-51547053480

[5] https://www.investopedia.com/how-cannabis-can-become-an-industry-worth-trillions-4588542

[6] https://business.financialpost.com/cannabis/capitalistic-america-faces-canada-fight-for-cannabis-supremacy

[7] https://www.forbes.com/sites/kriskrane/2018/04/25/cannabis-cultivation-will-be-a-race-to-the-bottom/#5f7a7d334184

[8] https://www.forbes.com/sites/kriskrane/2018/04/25/cannabis-cultivation-will-be-a-race-to-the-bottom/#54b862154184

[9] https://www.westword.com/marijuana/wholesale-marijuana-prices-in-colorado-continue-inching-up-11279663

[10] https://www.forbes.com/sites/kriskrane/2018/04/25/cannabis-cultivation-will-be-a-race-to-the-bottom/#12537ff54184

[11] https://www.bloomberg.com/opinion/articles/2019-04-18/altria-shows-there-s-a-better-way-to-value-cannabis-stocks

[12] https://www.cnbc.com/2019/01/28/cramers-pot-predictions-for-2019-legalization-deals-brands.html

[13] https://www.ionicbrands.com/news-events

[14] https://www.nytimes.com/2018/01/24/technology/marijuana-start-ups-go-beyond-the-simple-joint.html

[15] https://www.invictus-md.com/news

[16] https://www.youtube.com/watch?v=MmUf_0uByOk

[17] The Supreme Cannabis Company

[18] 1833 Industries

[19] https://www.weekendunlimited.com/news

Cynthia Berryman

Cynthia Berryman covers markets and microcaps, and has written for financial newsletters that include The Motley Fool, Investor’s Business Daily, Forbes, Street Authority, and others. With keen insight into trends, she helped guide investors to safe dividend-paying stocks in 2007, high-flying resource stocks in 2011, and Bitcoin profits in 2017, as well as other prescient and profitable picks.