Cannabis Investors Should Avoid Mania; Focus on Oils and Edibles
This is individual research and does not constitute investment advice.
My whole career has been focused on trends.
Everything from oil and natural gas price moves from one hub to the next – from one season to the next – all the way to the latest advances in technology and emerging industries.
I’ve made money trading seasonal and cyclical industries. I’ve made money trading cutting-edge tech companies. And I’ve made money in cryptocurrencies and cannabis.
Of course, it’s the latter that really has my attention.
That’s because of the enormous potential the emerging industry offers.
I believe legal cannabis will be a $200 billion industry by 2030.
And as cannabis moves from illicit to everyday use, investors will be handsomely rewarded.
Though it won’t be without its pitfalls. I’ve been involved in the markets long enough to understand that. Especially as hype tends to cloud common sense.
Enthusiasm is high now.
In just a couple of weeks, recreational cannabis sales will kick off in Canada, launching what’s expected to quickly become a $23 billion market.
In 2017 alone, Canadians spent more than $5.7 billion on legal weed…
And as adult-use sales expand nationwide in the weeks ahead, that total will quickly be eclipsed.
But an even bigger prize is on the horizon. And it won’t happen until the second half of 2019. That’s when the cannabis-infused edibles market will go live in Canada.
This is a massive opportunity.
And it’s one investors should be thinking about positioning themselves for right now.
Some projections have this segment vaulting past traditional recreational smoking almost instantly.
For example, in Canada there are as many as 6 million recreational cannabis smokers waiting to light up on October 17. On the edibles side, more than 15 million consumers are waiting.
That’s because smoking is bad for you. More consumers are willing to ingest cannabis through candies, desserts and drinks than inhale.
I 100% agree that the edibles market will blossom into the marquee sector.
Though recently cannabis-infused beverages have become hotter than cryptocurrencies.
And though the long-term prospects are good, the short-term action is once again scary.
Last year, Constellation Brands (NYSE: STZ) bought a 9.9% stake in Canopy Growth Corp. (NYSE: CGC). It was the first major multibillion-dollar investment from outside the industry. And it’s all about the second half of 2019 and beyond. Canopy CEO Bruce Linton sees customers walking into a bar and ordering a “Tweed and tonic.” (For those who don’t know, Tweed is Canopy’s premium cannabis brand.)
Molson Coors (NYSE: TAP) has followed suit with its own partner.
And this buzz has investors on the hunt for the next big winner, especially as PepsiCo (Nasdaq: PEP) and Coca-Cola (NYSE: KO) are looking to enter the arena. The latter is in talks with Aurora Cannabis (OTC: ACBFF).
The mania is at a premium… and that means investors must be careful.
We’ve already seen shares of India Globalization Capital (NYSE: IGC) and New Age Beverages Corp. (OTC: NBEV) explode higher on their announcements…
India Globalization is up more than 550%, and New Age Beverages is up more than 375%… in just the past month.
I would be quite hesitant to plow into either of these. Both are in situations similar to what we saw with Tilray (Nasdaq: TLRY) a couple weeks ago.
In the U.S., the cannabis-infused beverage market is expected to be worth $600 million by 2022. Of that total, $260 million is represented by CBD beverages and $340 million by THC-infused beverages. Canada’s market could be larger in the near term.
So at this particular moment in time, the infused beverage market appears quite frothy.
Plus, we’ve started to see some cracks appear as smaller companies pushed higher on the hype are starting to roll over.
Even more troubling, management teams of some of these smaller companies, like DavidsTea Inc. (Nasdaq: DTEA), have had to release statements saying there’s no reason for their skyrocketing share prices.
Long-term investors must focus on producers that have the majority of their revenues coming from oils. And that have developed formulas for infused beverages or edibles.
Those are the companies that’ll benefit from partnerships – like Canopy and Constellation, Molson Coors and HEXO Corp. (OTC: HYYDF).
I have a saying I share with investors: Dried flower is fine and dandy. But you need oils and extracts to make edibles and candies.
These fly-by-night manic moves can spark FOMO (fear of missing out). But pump the brakes.
Investing manias are extremely dangerous.
Traders can trade on them. But long-term investors shouldn’t.