Navigating The Maze Of The Cannabis Market After The Daze Of Summer

Even before word of the DEA's landmark rescheduling of cannabidiol (CBD) for GW Pharmaceuticals GWPH FDA-approved Epidiolex, the cannabis market has had a hot summer.

Medical cannabis is now legal in 31 states and the District of Columbia, with adult-use markets open in 9 of them plus DC. Meanwhile, Canada next month becomes the second country in the world to legalize cannabis for adult use nationwide.

In July, seasoned Proctor & Gamble PG executive Brian Athaide left the company after 25 years to become CEO of Green Organic Dutchman Holdings. In August, Big Alcohol player Constellation Brands announced that it was adding $4 billion to its investment in Canopy Growth, Canada's largest cannabis company. Then last week, The Coca-Cola Co. KO reported interest in the potential for cannabidiol-infused beverages to compensate for generally decreasing sales of sugary drinks; stocks for Aurora (the Canadian grower reported to be Coke's partner) spiked 17 percent to close at CAD10 (USD7.70) on Monday.

It has been widely predicted that tobacco and alcohol companies would be interested in the legalized cannabis market, given their relative parallels in production, marketing, and distribution. Given projections for the U.S. market to be worth $23.0 billion by 2025, it is even more likely to draw the interest of players like Philip Morris International, Inc. PG, Molson Coors Brewing Co. TAP, or Coke's nemesis PepsiCo, Inc. PEP. As the Canadian market opens for adult use, speculators envision about a half-dozen companies being ripe for acquisition.

Investment analyst Cesar Ramirez of New Frontier Data notes that over the past year, cannabis companies have seen a positive run with 7 of the top 12 cannabis stocks by market cap posting a return of 200 percent or better. Most notably, year-to-date shares of Canopy Growth Corp. CGC have soared more than 500 percent since 2017, fueled by direct investments from Constellation Brands, Inc. STZ. As of market close on Sept. 14, 2018, Canopy Growth is the largest company in the cannabis industry, with a market cap of $10.81 billion.

As for where things are heading, Ramirez says "there are lots of different opinions. I would lean towards stock prices somewhat being overvalued; however, in the short term and medium term there is still room for upward price movement. I think the momentum of cannabis stock prices will continue to rise for the foreseeable future, and at some point, the sector will cool down with potential major declines. Longer-term, I would remain bullish on cannabis stocks despite any major declines."

He summarized being "bullish in the short term, and looking over the long term with heavy caution, especially depending where the companies are listed (in the U.S. versus Canada). If U.S. investors had more access to the Canadian market, I think cannabis stocks would be higher. As far as M&A activity I am only aware of the bigger moves that have been made recently. What I have been seeing is that in these next couple of months or years the industry will undergo lots of consolidation. and those who can survive this period are the long-term players whom people will want to invest in."

J.J. McCoy

J.J. McCoy is Senior Managing Editor for New Frontier Data. A former staff writer for The Washington Post, he is a career journalist having covered emerging technologies among industries including aviation, satellites, transportation, law enforcement, the Smart Grid and professional sports. He has reported from the White House, the U.S. Senate, three continents and counting.

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