Cannabis Corner: Get Ready for Canada 2.0

Hilary Kramer

Hilary Kramer is an investment analyst and portfolio manager with 30 years of experience on Wall Street.
Canadian Currency

While Canada remains a bonanza for investors looking to capture coast-to-coast legalization, recent deregulation has been slower than a lot of companies anticipated, leaving the stocks stuck in low-margin limbo. Now the rules bend back in our favor.

Canadian dispensaries currently sell only oils and sprays in addition to the raw plant product. It’s a $5 billion business, but it’s as close to the ground as it gets. There’s no room for distributors to differentiate themselves or get any kind of pricing power.

If anything, the flood of eager growers into the market has created a glut, depressing wholesale prices and encouraging some consumers and suppliers back into the unregulated underworld. For business models that relied on fixing the value of every ounce sold to a captive audience, it’s been a surprisingly gloomy season.

We’ve seen big names like Canopy Growth Corp. (NYSE:CGC) and Aurora Cannabis Inc. (NYSE:ACB) struggle with this fundamental challenge. In theory, growing more raw plant product means bigger sales, but when every ounce is worth less, you’re barely running in place.

And when the only commercial outlets are commodity products that all look more or less the same, everyone feels the pain. That’s why there’s been so much talk around Canada expanding the legal cannabis universe to include enhanced snacks, beverages and other consumer categories where branding has power and margins can get some relief.

This is what we call “Canada 2.0.” It was originally supposed to happen back in July, but regulatory questions pushed the final green light back to December. But while the delays were frustrating, the reality is good news for Big Cannabis and the entire industry.

Dispensary operators now get to stock their shelves like real retailers, with a wider range of higher-price-point merchandise to grab a bigger share of customer wallets. That makes them happy, encouraging them to open more stores.

More stores create additional outlets for raw as well as derivative products, effectively moving more money back to the cultivators and potential partners like Mondelez International (NASDAQ:MDLZ), PepsiCo (NYSE:PEP) and of course Canada’s own Molson Coors Brewing Co. (NYSE:TAP).

We’ve been waiting for this for years. Now it’s really happening and we’ll start to see the impact on the quarterly numbers in the next few months.

However, I’m pleased that not every big cultivator is a prisoner of declining commodity prices. Aphria Inc. (NASDAQ:APHA) soared 24 percent on October 15 after reporting a bonafide profit for the recent quarter. 

Management even said it captured a 5 percent higher price per ounce than it did earlier this year. In a world where every other giant is discounting its harvest to clear out the warehouses, that’s huge. 

Admittedly, the company is still a long way from sustainable profitability. But the numbers are moving in the right direction and that’s worth applauding.

My Turbo Trader subscribers already know Aphria. It’s a key player in the Marijuana Millionaire Portfolio, outperforming the group by 21 percentage points this summer. Keep your eyes on the prize and welcome to Canada 2.0.

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