Longhorn Investment Team 4/20 Report

Yooooo what’s up ahahahahahhahahahah. It’s 4/20 so we’re delivering a special report all about the cannabis industry. We know it’s kinda unoriginal, but c’mon, everybody’s doing it!

Some Industry Facts

  • Weed Sales go up on 4/20. We still don’t know why, but dispensary visits jump about 59% on this holiday, while purchases in legal states increase by about 60%.
  • Growth Trends. We’ll make this list quick:

CBD: Customers usually pay 50% more for these products than THC products because of supposed medical benefits.

Edibles: These are growing quicker than regular bud sales (50% in six months) because why smoke weed when you can eat it I guess.

Omnichannel: Think of dispensaries as brick and mortal retail for weed (because they are). Couldn’t these outlets get crushed by a weed delivery service? Ecommerce for weed already exists on sites like BudTrader.com (must be 21 or older, kids!), so keep an eye on whether or not the retail apocalypse will engulf dispensaries.

Women: That’s right, females. Some weed companies in California suggest that women account for 75% of sales. Why? Because moms buy the vitamins and health stuff for the family, and they’re on that CBD wave big time. Other surprising target markets include pets (with anxiety, of course) and Baby Boomers.

  • A Resilient Industry. Marijuana is something that people are just gonna buy, man. Cannabis is considered a “vice industry” (not because of all the Vice weed documentaries). Similar to tobacco and alcohol, people are always going to spend money on weed­ – especially the 30% of users who are dependent on the drug and the moms who buy CBD for medical reasons. When you’re looking for weed stocks that can weather a recession, look for high-quality weed producers and healthcare focused firms.
  • Types of Weed Stocks. There are 3, and each classification faces its own set of risks.

Weed Producers (the farmers) include Aurora Cannabis, Cronos Group, and Canopy Growth Corporation. Many of these companies are widely known as pure-play cannabis stocks and are worth billions. However, none of these major gas growers are remotely profitable, as they are locked in a race to either produce the most kush or develop the dankest strain known to man.

A major concern for these players is a coming supply crunch. As more and more producers flood the market with cannabis, weed prices should only decrease, which could pressure these white-hot stocks, which are undoubtedly overvalued based on traditional metrics.

Weed Doctors (weed+biotech) include firms like GW Pharmaceuticals and 22nd Century Group. These companies develop medical applications for cannabis. They are subject to the same risks as any biotech or pharmaceutical stock, namely the fact that they pour millions into therapies that may or may not get approved…or even work.

Weed Services (packaging to greenhouses – anything that grows with the weed industry) include KushCo Holdings and Scott’s Miracle Grow, the owner of Hawthorne Gardening. KushCo is a market leader in packaging weed products, while Hawthorne is a leading provider of hydroponics used in cultivation. These companies are less exposed to risks associated with the weed market itself, but their other lines of business could add additional idiosyncratic risks investors should consider.  

Should I Invest in the Devil’s Lettuce?

A good question, indeed. While the broader market for cannabis will undoubtedly balloon with changing political tides in the United States and its growing popularity amongst multiple demographics, it’s tough to bet on these notoriously volatile companies that may or may not fully capitalize on the green rush. Moreover, established cannabis stocks already have weed’s growth prospects priced in to their valuations. In other words, it’s not like Aurora Cannabis is worth $8 billion because of its negative earnings; it’s all because investors are high on the company’s future growth prospects.

Safer ways to invest in weed include ETFs like MJ, a fund that tracks an aggregate of several weed-related equities. Picking the right weed company can feel like picking a needle in a haystack, so why not buy the haystack with an ETF? Additionally, larger US companies own stakes in certain Canadian weed companies. Namely, Altria Group, the makers of Marlboro, own a stake in Cronos Group, while Constellation Brands, a conglomerate of alcohol labels, bought a stake in Canopy Growth to explore cannabis-infused beverages.

Other News:

Citi joins the list of banks that no longer drug test for marijuana. This was in response to a New York City law that will ban marijuana drug testing for potential employees.

Interview Advice: The first question you should always ask a recruiter is “Do you drug test?”

Coming Soon:

You really thought we were gonna leave you hanging on the Autonomous Vehicle news? Just stay tuned, it will come in our next weekly insight. Until then, enjoy your holiday, and remember that the government is watching you through your laptop camera!