In cannabis, most of the revenues are captured by a handful of companies…
We all like it at the top.
A lifetime of experience proves that rewards come our way when we compete well.
And right now, in the United States, Canada, and increasingly around the world, you’ll find companies competing fiercely to dominate the rapidly growing $400 billion global market for cannabis.
As investors in cannabis stocks, you want to know how much of that market the top companies will reap so you can focus your holdings on the stocks of companies most likely to win.
After all, there’s no better way to limit your wealth than by spreading yourself too thin.
But you don’t need a crystal ball to predict how much the best competitors will win for themselves.
It’s something we can know today, thanks to this age-old pattern that holds true in cannabis…
The Law of the Vital Few
First discovered over 120 years ago, the Law of the Vital Few can tell us how much of the cannabis market will be captured by the most dominant Vital Few cannabis companies.
Let me explain.
In the late 1800s, an economist named Vilfredo Pareto began studying land ownership in Italy. What he found was that 80% of all land was owned by 20% of the population. As he expanded his study to other countries, he found this same pattern repeating itself again and again.
Over time, as other aspects of the economy were studied – like wealth distribution and market share – economists, statisticians, and management consultants saw the same pattern.
This persistent pattern goes by many names – the 80/20 rule, Pareto Distribution, and the Law of the Vital Few.
And when we look across industries, 80% of almost any pie goes to a Vital Few 20% of companies.
Though the cannabis industry is still young, it too has its Vital Few.
Applying the 80/20 Rule to Cannabis
There are hundreds of publicly traded companies, and even more still private, all vying their share of cannabis demand. But most of the revenues are captured by a handful.
For example, I looked at the revenues across 161 publicly traded cannabis companies. (There are many more that are publicly traded, but I only looked at the ones for which I get good financials and that generate most of their sales through cannabis.)
Over the last 12 months, sales for those companies came in at $5.9 billion.
Now, should the 80/20 rule hold, that means the Vital Few would include 32 companies (20% of 161), and their collective revenues should equal $4.7 billion (80% of $5.9 billion).
Lo and behold, when we add it up, the top 32 companies ranked by sales grabbed $4.78 billion over the last 12 months – proving yet again that no matter where you look, 80% of the spoils go to 20% of the players.
And based on the most recent financials, here are the current cannabis Vital Few.
Meet Your Cannabis Vital Few
The table below lists the top 32 publicly traded cannabis companies by revenue.
Top 32 Publicly Traded Cannabis Companies by Revenue
|1||GW Pharmaceuticals (Nasdaq: GWPH)||9||MedMen Enterprises Inc. (OTC: MMNFF)||17||GrowGeneration Corp. (Nasdaq: GRWG)||25||Planet 13 Holdings Inc. (OTC: PLNHF)|
|2||Aphria Inc. (Nasdaq: APHA)||10||Greenlane Holdings Inc. (Nasdaq: GNLN)||18||Charlotte’s Web Holdings Inc. (OTC: CWBHF)||26||The Valens Company (OTC: VLNCF)|
|3||Trulieve Cannabis Corp. (OTC: TCNNF)||11||Cresco Labs Inc. (OTC: CRLBF)||19||Columbia Care Inc. (OTC: CCHWF)||27||Innovative Industrial Properties Inc. (NYSE: IIPR)|
|4||Canopy Growth Corp. (NYSE: CGC)||12||TILT Holdings Inc. (OTC: SVVTF)||20||MediPharm Labs Corp. (OTC: MEDIF)||28||Zenabis Global Inc. (TSX: ZENA)|
|5||Green Thumb Industries (OTC: GTBIF)||13||KushCo Holdings Inc. (OTC: KSHB)||21||Acreage Holdings Inc. (OTC: ACRGF)||29||iAnthus Capital Holdings Inc. (OTC: ITHUF)|
|6||Curaleaf Holdings Inc. (OTC: CURLF)||14||Village Farms International Inc. (Nasdaq: VFF)||22||TerrAscend Corp. (OTC: TRSSF)||30||Hexo Corp. (NYSE: HEXO)|
|7||Aurora Cannabis Inc. (NYSE: ACB)||15||Harvest Health and Recreation (OTC: HRVSF)||23||Medical Marijuana Inc. (OTC: MJNA)||31||MariMed Inc. (OTC: MRMD)|
|8||Tilray Inc. (Nasdaq: TLRY)||16||Ayr Strategies Inc. (OTC: AYRSF)||24||OrganiGram Holdings Inc. (Nasdaq: OGI)||32||Fire & Flower Holdings Corp. (OTC: FFLWF)|
I’d like to note a couple of exceptions. I excluded Alcanna Inc. (OTC: LQSIF) because most of its sales are derived from alcohol sales, and Amyris Inc. (Nasdaq: AMRS) because it doesn’t yet have meaningful sales from cannabis.
We could also debate whether Innovative Industrial Properties belongs on the list because its revenues are derived from lease payments on cannabis facilities, but it wouldn’t meaningfully change the results in any case.
Now, you should know that I wouldn’t recommend owning all of these companies.
(Although if you are looking for a list of cannabis stock recommendations, you can check out my list of “best buys” for 2020 right here.)
For starters, the companies included in the top 20% will change over time. Competition is a constantly shifting landscape.
Second, just because a company is capturing a decent chunk of the market doesn’t mean it is well run or can provide a return that makes investors happy.
Thirdly, this isn’t to say that you should only buy stocks in the top 20% of sales. There are plenty of well-run cannabis companies trading at a discount to the level of sales they can generate. And mergers and acquisitions (M&As) will quickly move companies up and down the ranking.
For example, Curaleaf’s sales do not reflect its acquisition of Grassroots, which just closed last week. Once those numbers get reflected on Curaleaf’s financials, this company’s sales will surge to the top.
But understanding how cannabis revenues get distributed across companies competing in the space will keep you from making fatal assumptions that overestimate how much any single company can capture. And you can consider which are likely to be at the top, and which have to make do with a smaller share.
This a critical aspect of investing. You need to make sure you make the right assumptions about how much revenue the company could possibly earn. The Vital Few can help keep your assumptions on track.
For even more Cannabis Investing 101 resources, explore our archives.
Don Yocham, CFA
Executive Director, National Institute for Cannabis Investors
To profit from cannabis, you need to recognize when companies do this. Continue reading…
6 responses to “These Top 32 Cannabis Companies Are Capturing 80% of the Sales”
July 27 2020