The most popular cannabis stocks rallied as much as 20% from washed-out levels that one analyst identified as “capitulation lows” on Aug. 28.
Then the bad news about lung ailments related to vapingturned worse and grabbed more headlines. Cannabis vapes are often implicated. So the ETFMG Alternative Harvest exchange traded fund MJ, -2.24% has fallen even below late-August lows, compared with 4% gains for the S&P 500 SPX, -0.39% since then.
So much for “capitulation lows.”
But the renewed weakness in volatile cannabis stocks means they look attractive again for at least two reasons.
First, very bullish developments for cannabis companies are about to play out in Canada. Dubbed cannabis 2.0, edibles, vapes and drinks will be legal, probably by the end of the year. Companies will start announcing new lines of products as early as October. Canada also is significantly increasing the number of cannabis stores.
Canada is the market that matters for investors, since publicly traded cannabis companies steer clear of the U.S. due to legal restrictions. Expect enthusiasm for cannabis stocks to build between now and early next year, when products hit the shelves in Canada in a big way.
Second, the scary vape news is a positive for companies that want to be big players in cannabis vapes, since consumers will see them as trusted, reliable suppliers. They’re more likely to produce safer vapes, compared with unregulated manufacturers that cut corners. Dodgy additives are probably responsible for the health problems among vapers. As people understand this, the vape cloud over cannabis stocks will dissipate.
Which cannabis companies will get the most lift from cannabis 2.0? Your best bet: Those that have a shot at being the Coca-Cola or Pepsi of cannabis. Branded edibles, vape and drinks command higher profit margins than cannabis bud, a commodity.
“You are going to have a few large brands coming out of this that everyone loves,” says Korey Bauer, portfolio manager of the Cannabis Growth mutual fund CANNX, -2.90%. Just like in the beer and spirits market, there will also be craft and specialty brands, says Motley Fool investment analyst Emily Flippen. “We are still in the early days of what will be a very big industry. Strong brands will define success.”
Cannabis companies with the best shot at developing brands are those partnering with companies that already know about brand development from experience. Here’s a roundup of the top contenders and their key partners, plus some “picks and shovels” companies.
Canopy Growth CGC, -2.65% : The “king” of vapes, drinks and edibles
Key partner: Constellation Brands STZ, -0.14%
Canopy plans a big push into vapes and cannabis drinks with its partner Constellation Brands, which distributes Corona. Canopy says its drinks will offer better dose control and bioavailability. Expect new cannabidiol (CBD) products, too.
Canopy has been developing products for years, but it hasn’t shared many details. That will start to change in October. “We look forward to showing what we’ve been working on,” says interim CEO Mark Zekulin. We may see promotions by Snoop Dogg and Seth Rogen, Canopy partners.
Canopy Growth recently booted out co-CEO Bruce Linton. Bauer thinks Canopy will bring in a CEO with a background in consumer products or pharmaceuticals to help develop branded drinks, edibles and vapes. “I see them as the king of the space,” says Bauer.
Flippen at Motley Fool thinks it’s better to get exposure to Canopy by owning shares in Constellation, which has a 38% stake in Canopy.
Hexo HEXO, -5.19% : Vaginal sprays, THC drinks, and lots of Ph.D.s
Key partner: Moslon Coors Brewing TAP, -0.04%
Hexo isn’t joking around about developing cannabis drinks, edibles and vapes. It has more than 25 chemists and food scientists with Ph.D.s working on it. Hexo plans to ramp that up to 100.
Their task? Develop “quick on and quick off” cannabis products to “enhance experiences” ranging from sports and weight control to sleep and sex.
Hexo offers a cannabis-based “intimate oil” called Fleur de Lune for women meant to be applied to the genital area. It sells a sublingual cannabis peppermint oil spray called Elixir, and a powder to add to drinks or sprinkle on salads called Decarb, which stands for decarboxylated, or dried and activated cannabis powder. It hopes to roll out a sparkling water that acts as a dieting aid by curbing the appetite without making users high.
Hexo wants to dominate the cannabis drink market through a joint venture with Molson Coors called Truss. “The Truss products are phenomenal. They taste great. They work super fast,” says Hexo CEO and co-founder Sebastien St-Louis. ”We think those are going to be a home run.”
He projects that five years from now, low-margin cannabis flower sales will produce 35% of Hexo revenue, down from 84% now. The rest will come from more-profitable cannabis drinks, edibles, vapes, sprays and other derivative products.
Cronos Group CRON, -6.09% : Vapes and hemp-based skin care
Key partner: Altria MO, 0.11%
With a $2.4 billion investment in hand from cigarette maker Altria, Cronos should be a strong contender in vapes. But it’s also getting into a broad array of other consumer products.
Cronos recently bought a company which sells hemp-based skincare and cosmetics products under the Lord Jones brand. They’re sold through Sephora, SoulCycle and other venues. “The beauty area will be a huge segment for a lot of these companies,” says Bauer.
In the second quarter, Cronos hired a chief innovation officer, Todd Abraham, to lead the effort to develop edibles. His background is in food science and product development at Procter & Gamble, Mondelez and Pillsbury.
Cronos already has brands. It sells specialized strains under names like High Expectations for “people who don’t take life too seriously,” and Spinach, a “farm to bowl” variety for “people who are sick of hearing about kale.”
OrganiGram OGI, -3.49% : Fast-acting nano-based cannabis chocolates and drinks
Key partners: Hyasynth Biologicals, PAX Era
Organigram has a “nano” technology that breaks down cannabis for fast-acting chocolate edibles and powders for drink mixes. These products take effect within 10 to 15 minutes, compared to much longer for the typical edible. The company has teamed up with PAX Era, which sells a pen and pod vape. Organigram plans to launch vapes, chocolates, and powder products in early 2020. It’s shopping for a partner in infused beverages.
Organigram has teamed up with Hyasynth Biologicals which says it can produce the active ingredients in cannabis using genetically modified yeast, for a fraction of the cost of growing plants. “There are no guarantees it will work out, but we really like that,” says Bauer.
Aurora Cannabis ACB, -5.40% : Pain relief in martial arts
Key partners: Ultimate Fighting Championship and Pax Labs
Another big cannabis flower provider, Aurora is branching out into vapes and CBD-based pain relief. The company has a partnership with San Francisco-based PAX Labs for vapes and is running studies with a mixed martial arts entertainment company UFC to test whether CBD can treat pain and inflammation.
Microcap speculation is risky. But if you venture down into the land of companies with a stock-market value of $500 million or less, consider these three names:
Auxly Cannabis CBWTF, -4.62% could be a winner given its portfolio of investments in cannabis companies that are developing consumer brands, says Motley Fool’s Flippen.
Consider “picks and shovels” companies with labs that extract active ingredients from cannabis for consumer products. Tim Seymour of Seymour Asset Management, which runs the actively managed Amplify Seymour Cannabis CNBS, -2.05% exchange-traded fund, likes Medipharm Labs MEDIF, -0.30%. Bauer at the Cannabis Growth fund likes Valens Groworks VGWCF, -3.45%.
“These are like refineries in the oil market,” he says.
At the time of publication, Michael Brush had no positions in any stocks mentioned in this column. Brush is a Manhattan-based financial writer who publishes the stock newsletter Brush Up on Stocks.