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All Contents © 2019The Kiplinger Washington Editors
By James Brumley, Contributing Writer
| September 26, 2018
The legality of cannabis – marijuana – within the United States is a gray area. It’s illegal in all forms at a federal level, but the nation’s Drug Enforcement Agency and other law-enforcement arms have largely decided to turn a blind eye to states that have legalized cannabis one way or another.
Nevertheless, the cannabis industry to date remains fragmented, served only by relatively small marijuana stocks and private companies that lose money more often than not. The missing ingredient: scale, or size.
While so-called “mom ‘n’ pop” shops may be able to eke out reliable profits, attempts at mass marketing have largely been fiscal failures. The cannabis business needs bigger backers if it’s going to become a mass-market product. But Fortune 500 companies have mostly opted to steer clear given the inconsistent and unclear legalities.
That’s changing, though. A handful of large, prominent companies are signaling that this market is becoming big enough to address. Today, we’ll give you a rundown of five blue-chip “marijuana stocks” to watch. Just note: These are enormous multinationals bringing in billions of dollars in revenues. Merely dipping a toe into the cannabis business won’t make these stocks suddenly double overnight. Instead, they offer ways to invest in sound, profitable businesses … with the potential for a little additional marijuana upside.
Data is as of Sept. 25, 2018.
Of the five stocks discussed in this article, beverage giant Coca-Cola (KO, $45.68) seemed the least likely to venture into the marijuana fray. But Coca-Cola shocked the world in September when it conceded it was thinking about it.
Let’s be clear: That’s a far cry from being in the business. Coca-Cola spokesman Kent Landers ultimately declared in an interview with BNN Bloomberg that “no decisions have been made at this time.” Still, merely saying “We are closely watching the growth of non-psychoactive CBD as an ingredient in functional wellness beverages around the world” is significant.
There are credible hints that the potential product in mind is a cannabidiol-infused drink. The company reportedly is in talks with Canadian marijuana stock Aurora Cannabis (ACBFF), which already is a key North American supplier of legal cannabis. Aurora already offers a cannabis-infused drink of its own, but it lacks the marketing firepower of a blue-chip stock such as Coca-Cola. A partnership between the two could be a win-win.
Cowen analyst Vivien Azer wrote, “Beyond KO, we would not be surprised to hear of a deal from (PepsiCo) as well (with CBD seemingly a good complement to their market share leading Gatorade franchise).”
Don’t let Imperial Tobacco Group’s (IMBBY, $34.60) over-the-counter listing fool you. OTC-listing fool you. Imperial is a stable, reputable $32 billion cigarette company. The U.K.-based firm simply doesn’t bother to maintain an exchange listing in the United States, which can often be more of a headache than it’s worth.
The company already has shown some interest in the legal marijuana business by virtue of a recent investment in a young cannabinoid company. That company is U.K.-based biopharma outfit Oxford Cannabinoid Technologies, or OCT.
Imperial Brands Ventures, a division of Imperial Tobacco, bought an undisclosed stake in the company in July. Imperial Chief Development Officer Matthew Phillips explained at the time, “Cannabinoid products have significant potential and our investment enables Imperial to support OCT’s important research while building a deeper understanding of the medical cannabis market.”
There’s still a considerable disconnect between tobacco cigarettes and medical cannabis, calling into question the potential synergies of the relationship. It seems unlikely consumers will be able to simply pick up a pack of marijuana cigarettes at their local convenience store, where Imperial Tobacco has a solid presence, anytime soon. The investment is only a stake in a healthcare company, and a speculative one at that.
Nevertheless, Imperial may have just tipped its hand.
Peter Horvath, CEO of cannabis company Green Growth Brands, has seen the revolution start to unfurl firsthand. But the industry has only scratched the surface. He explains, “As cannabis continues to evolve to the mainstream, in Canada on October 17, and state-by-state in the U.S., more and more large companies AND talent from those companies will enter the market, because no other market is growing like this market … depending on your source, +$28 billion USD in the next 5 years.”
Through his business-oriented lens, Horvath also knows where many of those consumer dollars are being redirected from: “Clearly, liquor needs to hedge customer migration to cannabis,” he says. “Beer is suffering, and liquor is down in mature recreational cannabis state in the U.S.”
The trend poses a direct threat to beer giant Molson Coors (TAP, $61.84), though the company may not be as behind the eight ball as it seems. In early August, Molson Coors’ Canadian unit entered into a joint venture with The Hydropothecary Corporation “to pursue opportunities to develop non-alcoholic, cannabis-infused beverages for the Canadian market.”
The exact nature and target market for this beverage is not yet clear; the companies themselves may not have anything particular in mind. But it is clear that Molson Coors knows it needed to plant a seed.
Despite a variety of ways to ingest it and enjoy the euphoric high of recreational marijuana, simply smoking it remains the preferred means of use. That leaves traditional tobacco stocks such as the aforementioned Imperial Tobacco and Philip Morris (PM, $79.91) the odds-on favorites to make the most out of ongoing legalization efforts here and abroad.
That said, cigarette companies may not be quite as keen to rush into the marijuana market as many believe.
Andrew Kessner, Equity Research Analyst at William O’Neil & Co., recently explained, “We think big tobacco will remain much more cautious than beverage makers about expanding into cannabis. These companies are hoping to gain FDA approval for reduced risk tobacco products (RRPs), like Philip Morris’s IQOS heated tobacco device. We believe a cannabis acquisition, even if outside the U.S., could weaken their standing with the agency and potentially jeopardize these RRP approval efforts.”
Philip Morris CEO Andre Calantzopoulos recently echoed the sentiment, telling Bloomberg the company has no plans at this time to enter the cannabis market. He also noted its recent efforts to cultivate alternatives to tobacco cigarettes.
But Calantzopoulos also glossed over the fact that the company is already in the cannabis business, even if it’s just indirectly.
In early 2016, Philip Morris invested $20 million in Israeli startup Syqe Medical, which has developed a metered-dose vaporizer of raw plant material. It’s for medical purposes only – for now – but it’s still a stake in the movement, and the technology could arguably be adapted for a variety of non-medicinal uses.
Constellation Brands (STZ, $214.51) is the name that rekindled the discussion of whether large corporations are ready to make their way into the marijuana market. In August, it invested a stunning $4 billion in Canadian-based Canopy Growth Corporation (CGC), which is that country’s largest supplier of medical marijuana.
It’s not just the biggest cannabis-minded acquisition to date. It’s also the boldest, with the buyer making no bones about its plans for the partnership.
Canopy’s CEO understands that the key to the business isn’t just to be a wholesale supplier of leaves or a product developer, but both. He explained even before Constellation’s investment was made that “by 2020 or 2021, there will be too much cannabis produced. If I’m still selling primarily an ingredient, I have completely dropped the ball. You want to transform it.”
Constellation Brands’ CEO Rob Sands is just as optimistic, saying when the big investment was announced, “Over the past year, we’ve come to better understand the cannabis market, the tremendous growth opportunity it presents, and Canopy’s market-leading capabilities in this space.”
Bruce Linton offered some loose hints about where the fresh capital may be directed: “We want to spend a lot more money on things that are globally applicable.” That’s likely to mean more edibles, which is expected by some to remain the hottest-growing sliver of the $45 billion cannabis market.