Cannabis Stocks: Smoking Hot or Up in Smoke?Smoking Hot Opportunity or Stoners’ Pipe Dream?

Previously residents in hippie enclaves darkened bedrooms and basements, and criminal circles, it seems that cannabis is now finding a home in medical labs and enterprising boardrooms. But, with science yet to prove ambitious claims of a medical panacea and regulations favouring continued prohibition, will cannabis ever deliver the medical, business, and investment possibilities its advocates claim for cannabis stocks? Or will it simply disappear up in the smoke of its own hype?

Whether you look at it with red-eyed reverence, scientific curiosity, or outright hostility, there is no denying that cannabis is facing a cultural renaissance. Indeed, some of the world’s most successful companies, including the inhabitants of Silicon Valley, are finding homes in areas well known for their tolerance of recreational cannabis use. While it could just be coincidence, many believe it isn’t. Indeed, some go as far to suggest that some of the world’s great innovations have been born out of a fondness for the pipe or bong.

It’s unlikely that we will ever determine the truth or otherwise of these geographic quirks, but it’s certainly true that cannabis is starting to be taken seriously by serious people. Demands for law reform are being driven at one end by those who enjoy this arguably benign drug, to those who see medical, industrial, and economic potential, at the other.  

Putting aside the largely unproven medical claims, which require expertise beyond what this investor possesses, it is impossible to ignore the global fondness for this hardy plant. But despite widespread use, and increasingly liberal laws, the warnings of doom and an out of control, drug-addicted society, have largely failed to materialize.

To cite just one example, despite its decriminalization in Amsterdam in 2003, you don’t hear the reports of death, illness, and lagging productivity many predicted in The Netherlands. In fact, this forward-leaning, progressive country leads the world in financial innovation, housing some of the world’s largest financial institutions we use every day. These include giants such as ING, Rabo Bank, and other energy/industrial power houses such as Shell, Unilever and Phillips.

The introduction of cannabis to the market will only really create opportunity by way of opening channels to companies that were previously closed off.  We have seen some large players, such as Diageo and Anhheuser-Busch Inbev, decide that a bit of cannabis in their drinks might just be the hit they need to evolve.  Large pharma companies such as Johnson & Johnson, Abbvie and Teva are also testing new ways of applying it to the medical world for the benefit of patients seeking symptom relief.  Finally, there is the king of them all in big tobacco companies who have all the distribution chains in place to efficiently distribute quickly and efficiently into society.  Not to mention the amazing marketing machines that these guys used to push, Formula One has never looked the same in quite a long time!

There will always be the risk of government over regulation when looking in this space. The stigma of cannabis is a hard thing to shake.  It’s a little like being told by your parents that the thing you were told was bad, is suddenly okay. It’s a confusing message.  Each country will take some time to grapple with this.  The other part, which is a bigger part of the risk equation, is the tax that governments would like to impose on suppliers.  Once more, they need to get this balance right otherwise it will drive people back to the illegal channels that this movement is seeking to slowly drive out.  If done well, the people who ultimately lose here are the current dealers as their profit margin, based today on risk taken for facilitating the transaction, would go back to society and put to good use.  We have seen some small examples already in Canada where people have reverted to the old ways and several new players could no longer survive, due to the government holding their hand out a little too much.

I have had a modest foray into the world of Canada’s cannabis investment, through companies such as MMJ Holdings.  This wasn’t my best move as it has been worth about 1/3 of what it was, due to the risk above with over taxation playing out.  The introduction of legal use in the United States, however, brings a new opportunity. 

I’ve watched Canopy Growth, Tilray, and Cronos for a while.  They have all lingered for the last 18 months as they have struggled to get their business models to succeed.  There is one, however, that I believe is primed to take off above the others, and that is Cronos Group.  When looking at the research Altria Group took at 45% stake at a price of $16.25 per share, which is more than double what it is trading today.  Unlike their peers, they are cashed up with more than a billion dollars on their books and could easily move to consolidate the industry. 

Back to Altria Group, the masters behind arguably the biggest known cigarette brand on the planet, Marlboro.  Their marketing might in the US, along with those distribution channels, definitely places then in a strong position.  Better yet, they did all this before the recent US election in which Harris announced the plan to legalize cannabis.  I personally have taken a position now in both, as I do see big things ahead for them. Having a sizable partner who knows the game is a big advantage.

At the time of writing:-

Altria Group – $42.75

Cronos Group – $5.35