The biggest winners, hands down, in the Canadian cannabis supply shortage are all of the smaller, later-to-market producers. It buys them time to get to market, and it will take longer for the first wave of suppliers who are already in stores to build up the brand loyalty they were counting on.
Sources from far and wide kept saying that Canada was not going to face shortages following its historic, nationwide legalization of cannabis for recreational use on October 17.
They were confident we weren’t going to see another Nevada situation – where a state of emergency had to be declared in the program’s first two weeks to ensure medical patients would actually have some product left to buy among frenzied recreational demand.
They were wrong.
Demand was far, far higher than any of the insiders thought, and Canada, which some people worried would see a glut of capacity, is low on supply or completely out of cannabis for the time being in some areas. Quebec at one point closed its province-owned stores three days a week to try to manage demand. British Columbia has dealt with sellouts. Ontario had to scramble to meet demand.
No one saw the frenzy of demand.
Canada has a very large and well-developed illicit market, and both the government and the producers thought it would take a long time to change consumer habits. But consumers were obviously enthusiastic about the prospect of buying their cannabis products from a producer that conducts testing of their product and sells it in a well-lit, pleasant, safe store.
It shows us just how high consumer demand is and will continue to be, which is encouraging for anyone with money invested in any cannabis stock.
These supply problems, though, are likely to persist for at least a few months.
And there is one group of companies that are the unmistakable winners from the shortage. And investors like you need to know who I’m talking about and the opportunity that has fallen into their laps.
Here’s what’s going on…
Need For Inventory Gives Small Companies a Golden Opportunity to Enter and Thrive
In the short run, I can see why some would be worried that this is bad news for the big Canadian producers and for the government. The producers are losing sales they might have had if they had foreseen the huge demand, and the provincial governments have egg on their faces because they did not order enough cannabis to meet that demand.
But it’s actually very good news for everyone involved in the long run – the Canadian legal market will grow faster than anyone thought, bringing higher revenues to the producers and eliminating the illicit market faster than the government had ever hoped.
The biggest winners, hands down, are all of the smaller, later-to-market producers.
Because of the supply shortages, it will be even more difficult than I first predicted for the large producers to reinforce their brands and create consumer habits. With consumers buying whatever brand happens to be available that day, the creation of those habits will have to wait until supply and demand come back into balance.
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That creates an enormous opportunity for those producers who are getting ready to start supplying the market for the first time or those who did not have a medical brand. I’m talking about producers like Hexo, The Green Organic Dutchman, Flowr Corporation, and others who chose to wait to get their products and their branding right rather than rushing to market to make the October 17 starting gun.
The fast market growth makes the recent decline in the prices of cannabis stocks look perplexing, but it’s not. A lot of investors made a lot of money in the run-up to October 17, and they clearly want to take some profits. That’s natural. And of course the fourth quarter results for the big producers will be less robust than investors expected as the shortage works its way out.
As an investor, you can profit from that natural behavior by buying stocks at a discount in an industry that looks to be larger than initially predicted.
In particular, the Canadian shortage has no effect at all on American producers except for reinforcing one lesson we’ve been pounding here at the National Institute for Cannabis Investors since our inception. That lesson? The legal market for cannabis is growing more quickly than anyone previously imagined – even the producers who stand to profit the most from it.
In market after market, the existing cannabis consumers are showing that they are eager to abandon the sketchy cannabis they’ve been buying from illegal dealers and purchase safe, tested cannabis from a clean, regulated store. Almost every U.S. jurisdiction that has allowed recreational sales of cannabis has seen sales exceed expectations. Some have seen shortages akin to the one Canada is facing now.
New recreational use state Massachusetts sold $2.2 million in cannabis in just five days from only two stores. Even California, whose tax and regulatory regime were poorly designed and kept prices above those seen on the illicit market, is seeing a growing legal recreational marketplace.
Smart long-term investors know to use short-term panics to accumulate shares of good companies because it means the longer-term rewards will be that much greater.
And the latter is exactly what my Cannabis Investor’s Report members have been doing in recent days and weeks. They’re ready for the coming boom.
Executive Director, National Institute for Cannabis Investors
8 responses to “Why the Canadian Cannabis Shortages Are Great News for Investors”
November 30 2018