Cannabis Corner: The Shakeout Begins

Hilary Kramer

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

Now that the leading players have acknowledged that the first phase of the cannabis boom has hit a limit, there’s a sense of mingled relief and resignation in the industry.

The giants like Aurora Cannabis Corp. (NYSE:ACB) are getting a bit of a bounce. They’ve acknowledged that the old euphoric math is broken and are making the tough calls to change course.

But quite a few of the small cannabis stocks are now in a difficult position. They jumped into the space to capture a bit of what looked like a spectacular opportunity, but never achieved anything more than niche stature.

It’s easy to be an ambitious start-up in a fragmented landscape where anyone with the right ideas, products, expertise and luck can become a champion. This late in the cycle, we’re seeing more than a few players leave the field.

Just a quick look at my cannabis screen reveals a lot of relatively obscure companies, such as Grow Capital Inc. (OTCMKTS:GRWC), that are pivoting to new business models.

GRWC wanted to get into cannabis tourism in Nevada. Now, the company has since unwound that effort to concentrate on financial technology instead.

These are signs that a healthy consolidation is underway. Shaking out fringe operations will feed market shares back to the entrenched giants. Companies like ACB will stretch farther.

Indeed, this was always the outcome I projected. You simply do not see an industry remain this fragmented for long, especially when so many of the products are essentially interchangeable.

Anyone with the right license can grow a plant and sell it for a fixed retail price. That’s commodity economics, which always favor scale. The bigger you are, the better you can survive by undercutting smaller competitors.

Exclusive  This Is What It Means

Those small competitors are going away now. And those that are still in the game are working harder than ever to find ways to differentiate themselves in the market.

Will they succeed? The most interesting names will make it into my IPO Edge portfolio and we’ll reap the rewards of their innovation over time.

Some have distinctive niche business models that don’t fit into the commoditized Canadian wholesale approach that companies like ACB have taken. They’re pursuing retail opportunities, business-to-business services and new geographical footprints.

Others are simply trying to reinvent the commodity wheel by adding value. They’re engineering new strains, new packaging and new products in order to stand out.

I think that’s where the real sizzle is coming. But before we get to Cannabis 2.0, a lot of me-too stocks that aren’t going to succeed with 1.0 models need to clear the field.

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