A special report on how the coronavirus is affecting cannabis companies, straight from the field…

As we spoke to the people coming into the dispensary I co-founded – Hashstoria – in early March, we saw smiles everywhere.

But you could sense things were a little off…

Tension and uncertainty were in the air. Some customers asked me, “Will everything shut down just like it did in China?” It’s a topic I wanted to dismiss as pure speculation, but we’ve all heard about the book, 1984, by George Orwell

“Perhaps,” was all I could force myself to say.

The fear of the coronavirus is real, and I had a sense that it might cause a recession at the end of February.

Now, a full month since then, I never expected to see a sales boom at our dispensary. Depending on the day, we were 25% to 50% ahead of last year. We had revenue days that rivaled 4/20 and Memorial Day, two of our best sales days.

It was insane.

But it wasn’t just our store.

A Temporary Boost in Cannabis Sales

The cannabis e-commerce platform, Jane Technologies, noted that “average store revenue is up 52% to 130% compared with January at more than 1,300 stores.”

And Steve DeAngelo, owner of the Harborside Inc. (OTC: HSDEF) chain of dispensaries in California, said that sales were up 20% to 25% at all locations.

Would the cannabis industry really get through the coronavirus shutdown unscathed? A lot of people would love for you to believe that. Especially when sales were peaking a few weeks ago.

Then came the social distancing orders.

Still, sales were holding up. Reason?

Boredom.

Many of our customers work in the service and tourism industry. Many haven’t worked in weeks. And they’re stuck at home, doing the same things over and over again.

It just so happens that while they’re watching movies, cleaning the house for the eighth time, or hanging out in the yard…they consume cannabis.

This increased consumption kept our sales strong for a few more weeks. But then cities began shutting down hotels and short-term rentals, kicking out the tourists that pour over $2 billion every year into the Oregon Coast.

That finally did the trick, and we started to see sales get weaker. But we were lucky; cannabis sales in California, Colorado, and Washington had begun plummeting weeks earlier.

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All that “stocking up” that happened? It’s over with. Everyone has what they need. And the fear that was driving the uptick ended the day states considered cannabis businesses “essential.”

How about cannabis tourism that helps drive sales in the spring and summer? Maybe it’ll happen in 2021. Even if every state ended restrictions on April 30, it would take at least until the fall for the economy to find its groove again.

Making matters worse, people are losing their jobs in record numbers. And while a lot of those jobs may come back, I expect many will never return. At least, not anytime soon.

Adjusting to a New Reality

There are 30 million small businesses out there. And a study by J.P. Morgan found half of them would fail within 27 days if no new cash came in the door.

That’s a major drag on the economy. There’s no doubt it’s going to affect the cannabis industry. Any producer or retailer that can’t adjust will be in a world of pain.

I’m already starting to see a “value mindset” shift in consumers coming into our stores. They want more product for less money. And they’re valuing different product categories over others. For example, how flower looks does not matter as much as whether it will give them the desired effect.

It’s a big change. Especially in a market filled with stubborn cannabis operators who refuse to move with the shifting tastes and demands of the consumer.

Ultimately, many of these players are going to end up selling their business to people like me.

So how, as an investor, can you use this information? It’s a reminder that running a cannabis business comes with big risks.

An Important Takeaway for Cannabis Investors

You see, a lot of operators like to think that cannabis is “recession-proof.” But they forget that “recession-proof” doesn’t mean “immune from insolvency.”

I can introduce you to a lot of “cannabis entrepreneurs” that lost a lot of money while the economy was booming. In a downturn, a weak company will fold. It doesn’t matter if it sells tissue paper, cannabis, or mattresses.

Just consider that 30 years ago, there were a lot more consumer staple companies. But over time, they were bought; or they failed. The nimble, revenue-rich companies were the survivors, oftentimes buying the competition at dirt-cheap prices.

The same is going to happen to the cannabis industry.

We started first seeing it when a huge wave of public Canadian companies swept into the United States and started buying cannabis companies like they would never be cheaper.

We all know how that turned out – those buyout candidates weren’t cheap at all. And expanding production in a country with 37 million people only matters if you’re able to actually sell what you grow around the world. Otherwise, it’s an awful waste of money.

But if you look just a little bit closer, you’ll find revenue-rich companies that are making the right tweaks to make it through this COVID-recession.

They’re streamlining production and introducing budget-friendly products.

They’re adjusting their marketing tactics to better fit into an economy that isn’t too hot.

But most importantly: They’re acknowledging that an economic slowdown is a reality.

One such company is Trulieve Cannabis Corp. (OTC: TCNNF).

As a profitable company with over $100 million free and clear (after paying outstanding debts), Trulieve is in a position to buy even more operators as the economic slowdown grinds on.

Take care,

Charlie Delvalle

Advisory Board Member, National Institute for Cannabis Investors


Comments

7 responses to ““They’re Going to End up Selling Their Business to Me””

  1. I find that a large percentage of your recommendations are for Canadian & US OTC traded companies. As a brand new self-directed investor, I have not found a way to trade these positions. Please tell me where and how I can trade these OTC stocks. (Apps? Free brokerage platforms like Robinhood? Discount brokerages?) thank you.

    • Hi David,

      The NYSE and Nasdaq do not allow pure-play American cannabis stocks to list on their exchanges because in addition to not being able to meet some of the listing requirements, cannabis is illegal under federal law. These exchanges do no want to help list a company that is breaking federal law. So the majority of cannabis stocks for the time being will be listed through the OTC market.

      The the good news is that many of our members have found these brokerages easy to use and they will let you trade OTC companies:

      eTrade 1 (800) 387-2331
      Fidelity – 1 (800) 343-3548
      TDAmeritrade – 1 (800) 669-3900

    • Hi April,

      To start you will need to open a brokerage account.

      These are some of the brokerages our members use and their customer service numbers are included to help you get started:
      eTrade 1 (800) 387-2331
      Fidelity – 1 (800) 343-3548
      TDAmeritrade – 1 (800) 669-3900

      Robinhood is also very easy to use, but it does not have all of the cannabis stocks we trade. But it is free to set up an account.

      You can also check out this report about setting up brokerage accounts we recently released – https://nicinvestors.com/2020/03/12/how-to-set-up-a-brokerage-account/

      In terms of the minimum to invest, that is up to each individual investor. Only you will know your risk tolerance and financial situation. A good rule of thumb is to never invest what you can’t afford to lose.

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