Recreational Sales to Accelerate M&A in Cannabis Industry
This is individual research and does not constitute investment advice.
New industries are exciting.
As an investor, I’m always focusing on emerging trends and nascent markets because not only are there big gains to be had… but there are tons of innovations to gawk at.
Novel ideas are being brought to life – disruptors whose ripples are felt sometimes far beyond their own industries.
In some cases, they impact our lives in ways we never could have imagined.
I mean, I have a phone that’s connected to all the information the world has to offer and a watch that can make phone calls.
I look for those ideas that begin on the fringe… but quickly move mainstream.
Cannabis is one of those.
And I think in a very short period of time, it’s going to be ubiquitous. Not just recreationally but medicinally as it helps beat back the devastating impacts of the global opioid crisis.
Of course, that’s a little ways down the road. Though it’s going to happen a lot faster than most people realize.
In the meantime, there are going to be some growing pains.
Time to Disintegrate?
Cannabis’s first major step in its global expansion began this morning in Canada.
You already know the story… It’s the first G7 country to legalize recreational use nationwide.
In anticipation of this, Canadian pot stocks have been on fire!
Since hitting lows on August 14, the Canadian Cannabis LP Index has shot up more than 70%!
Record highs are being set left and right.
Canopy Growth Corp. (NYSE: CGC) shares have set new all-time highs.
As have the shares of Aurora Cannabis (OTC: ACBFF), OrganiGram Holdings (OTC: OGRMF), CannTrust Holdings (OTC: CNTTF) and others.
For pot stock investors, it’s been a time to celebrate.
The wait is over. The registers are ringing.
The question is “Now what?”
Beyond those first sales, what can the industry expect?
If you want to believe the most radical of predictions, this is the final celebratory moment before disintegration begins.
The CEOs of Canopy Growth and CannTrust see opportunity – as do I. But this is also an industry that’s about to undergo some drastic changes.
Consider this: There are roughly 135 publicly traded Canadian cannabis companies. That’s not a very large pool.
I like to remind investors that there are six times as many cryptocurrencies as there are publicly traded cannabis stocks across the globe.
But over several years, that pool of cannabis stocks could rapidly shrink.
CannTrust Chairman Eric Paul recently said there may be as few as “half a dozen major” Canadian cannabis companies three years after legalization.
Canopy Growth CEO Bruce Linton expects “disintegration.”
In their view, a reckoning is on the way as bankruptcies and failed models will cause casualties to mount. Not to mention the massive wave of consolidation.
Already, over just two years, Aurora Cannabis (OTC: ACBFF) has gobbled up 20 companies.
Canopy Growth has been on its own tear. Just two days ago, it announced it was acquiring Colorado hemp research company Ebbu for CA$25 million. At the end of August, it bought Hiku Brands.
But it’s not just the big guys. Every week, the cannabis industry sees a string of acquisitions.
Just recently, MTech merged with MJ Freeway… Flower One Holdings (OTC: FLOOF) acquired NLV Organics… MedMen (OTC: MMNFF) acquired PharmaCann LLC for $682 million… and Stem Holdings (OTC: STMH) bought Yerba Buena.
We’re heading toward a future of Coca-Cola (NYSE: KO) versus PepsiCo (Nasdaq: PEP)… Anheuser-Busch InBev (NYSE: BUD) versus Molson Coors (NYSE: TAP)…
Sure, there will be smaller players. But the industry will be controlled by essentially just a couple of giants. Though, in reality, that’s what we already have.
This year has been dominated by deal after deal after deal. Large players have been gobbling up smaller ones, trying to strengthen their asset portfolios against one another.
Now that recreational sales are underway in Canada, expect the mergers and acquisitions to pick up speed. The market data will show which brands are pulling the strongest – making them the most valuable – as well as highlight the ones that are struggling.
The period of the great cannabis consolidation isn’t over… it’s just beginning.