Analysts are comparing the cannabis movement, better known as “The Green Rush,” to the California Gold Rush of the mid-1800s. History reveals that that only a few miners actually “struck gold” but the businesses selling items to assist miners in their quest, such as picks and shovels, did. If history repeats itself, then the “picks and shovels” approach might be a decent strategy for investors to consider. In this article, I discuss three well-known companies that have a line of business involved in the cannabis industry.
History reveals that that only a few miners actually “struck gold” but the businesses selling items to assist miners in their quest, such as picks and shovels, did. If history repeats itself, then the “picks and shovels” approach might be a decent strategy for investors to consider. In this article, I discuss three well-known companies that have a line of business involved in the cannabis industry. 2018 was a game-changing year for cannabis. Canada became the star player by legalizing adult recreational use, and the United States had some pretty good plays also. As an indication of the changing political climate, former Republican speaker of the house, John Boehner, who once was “unalterably opposed” to decriminalizing marijuana joined the Board of Directors of a major grower and seller to assist with its political agenda— federal legalization.
Changing the Rules of the Game
Until recently, cannabis was completely illegal in the United States. Under federal law, cannabis is separated into two different plants. Industrial hemp, which contains less than 0.3% tetrahydrocannabinol (THC) and marijuana is any plant that has more than 0.3% of THC. The law focuses on THC because it is the substance which provides the “high” that marijuana is known.
But in December 2018, Congress ended over 80 years of prohibition against all forms of cannabis when it legalized industrial hemp. Although cannabis has only been illegal since 1970, the Marihuana Tax Act of 1937’s difficult regulatory and tax scheme made growing hemp not worth it.
For clarity, marijuana is still illegal. The Controlled Substances Act’s definition of a Schedule I drug, “no currently accepted medical use and a high potential for abuse” still applies. But in July of 2018, the Food and Drug Administration (FDA) approved Epidiolex, the first naturally derived cannabis drug, as a treatment for seizures associated with two rare and severe forms of epilepsy, Lennox-Gastaut syndrome, and Dravet syndrome. Two months later, the Drug Enforcement Agency (DEA) rescheduled the drug to a Schedule V indicating that it has a “low potential for abuse and low risk of dependence” which further calls into question cannabis’s Schedule I classification.
With the changing political climate around the plant, it is essential to understand a few things namely, not every cannabis opportunity touches the plant. Let’s take a look at three relatively unknown cannabis companies.
A little bit of Kylie and a whole lot of weed
Shopify (NYSE: SHOP), the Canadian eCommerce platform that hosts notable brands such as Kylie Cosmetics and Tesla, is responsible for hosting marijuana eCommerce. Two of the world’s largest producers, Canopy Growth Corporation (NYSE: CGC) and CanniMed, subsidiary of Aurora Cannabis (NYSE: ACB), use Shopify to sell cannabis online specifically for ease of use and compliance with government regulations. Shopify also provides e-commerce websites for government-run programs in Ontario, British Columbia, Newfoundland, and Prince Edward Island, in addition to several non-government retailers in other parts of the country. The strength of Shopify’s platform tested the day marijuana became legal; the online cannabis stores processed more than 100 per minute with zero outages.
Joining the competition
As a relatively new industry, Cannabis is a disruptor to the tobacco and alcohol industry. Cannabis is predicted to have a significant impact on alcohol consumption and squeeze tobacco’s already shrinking market share.
Here’s the opportunity. Traditional financing sources are not readily accessible for cannabis companies partially because of issues regarding legality and slim profit margins. Lack of financing created an excellent opportunity for the cash-rich tobacco and alcohol industries to jump in.
In November 2017, Constellation Brands, the owner of Corona and other major alcohol brands, invested over $180 million to form a “strategic partnership” with Canopy Growth Brands (NYSE: CGC), the world’s largest cannabis producer. This agreement provided Constellation Brands with the option to purchase additional ownership interests in the future. Less than a year later, in anticipation of Canada’s legalization of recreational use, Constellation exercised this option and invested $4 billion increasing its ownership percentage to 38%.
In December 2018, Altria Group (NYSE: MO) the parent company of tobacco giant Phillip Morris invested $1.8 billion into Cronos Group (NYSE: CRON). The terms of this deal gave Altria a 45% interest in Cronos with the option to increase its stake to 55% in five years.
What’s an investor to do?
Because the cannabis industry is moving at the speed of light, it can be tough for even the savviest investor to keep up. Education regarding the significant players, industry trends, and changes in the law are essential to navigate these choppy waters. Free eBook: 10 Terms Cannabis Investors Need to Know