If you’ve ever thought about investing in cannabis stocks, now is the time to do it…
As our readers know, we are entering into what I like to call “Phase 2” of the cannabis growth cycle.
Phase 1 was the “Opening,” with a ton of startups and small firms. We saw new players constantly entering the market. During this phase, nobody had a giant market share, so there were no clear winners yet.
Now we’re entering Phase 2, and we will start to see massive consolidation. Smaller companies start merging, and bigger companies will acquire smaller ones.
What I want to talk about today is the smaller companies. We will see some of them merging because they need to band together to take on industry giants like Canopy Growth Corp. (NYSE: CGC).
We still want the kings of cannabis in our portfolio, but there’s still going to be room for smaller players, and they can make their shareholders a lot of money.
Let me explain why, during Phase 2, cannabis stock prices really take off for small companies…
A Look at Cannabis Consolidation
An example of M&A activity for smaller companies I want to highlight is Cannabis One Holdings Inc. (CSE: CBIS). It’s going on an absolute acquisition spree. Cannabis One Holdings develops, markets, and provides packaging for cannabis-related products, and it is now bringing in actual cannabis products as part of its holdings.
- On April 1, Cannabis One Holdings announced it would acquire certain assets from Fat Face Farms, a recreational cannabis grower in Colorado.
- On April 10, Cannabis One Holdings announced it would acquire certain assets from Honu Enterprises Inc., an award-winning, cannabis-infused products brand.
- On April 22, Cannabis One Holdings announced it would acquire certain assets from Evergreen Organix, which operates an award-winning cannabis product line.
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With all these moves, Cannabis One Holdings could have products, marketing, and packaging services, all under one roof.
But can the small players really survive?
They can, and the soda industry is the perfect example that showcases how small companies can still grab a piece of the pie.
Lessons from the Soda Market
In the beverage world, Coca-Cola and Pepsi are the two biggest players in the game. As you can see in the graph below, if someone drinks a soda, it’s probably going to be a Coca-Cola or Pepsi product. One of the lessons from this is that both companies grew to where they are today because of acquisitions. Coke bought Minute Maid in 1960 and bought a stake in Monster Beverage in 2015. Pepsi acquired Tropicana in 1998 and Naked Juice in 2007.
But you’ll also notice that they don’t control all of the market. There is room for other beverage makers out there, and they can make a lot of money. That’s also going to be true for cannabis companies, especially in Phase 2, which is another lesson to take note of.
A smaller company can either sell to one of the big guys, or they can make nice returns on their own. Small companies can carve out their piece of a pie expected to reach $1 trillion, and early shareholders are going to be rewarded in the long term.
Take Jones Soda Co., for example. Even though Coke spent $4 billion on advertising in 2018 and Jones Soda has a market cap of just $32 million, Jones still has been in business since 1987.
It’s a carbonated beverage and has a huge millennial following. It managed to generate $220 million for the quarter concluding on January 26.
And how about Reed’s Inc.
Reed’s makes small-batch craft soda, and it has a focus on using real ginger because of its health benefits. So far in 2019, the stock price for Reed’s has climbed 55%.
This shows there’s still a lot of room to carve out a good living in the beverage market for small players, and the same thing is going to be true for cannabis companies. You don’t have to take on the world if you don’t want to.
You just have to be pretty darn good at what you do.
The only difference between these two industries is that the profits for small players are going to be ramped up even more and the returns for shareholders are going to be even bigger.
Executive Director, National Institute for Cannabis Investors
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16 responses to “This Cannabis Phase Leads to Massive Profits”
April 25 2019