Empirical evidence pertaining to many disruptive developments such as the invention of the World Wide Web, the growth of social media platforms, and the over-the-top content streaming industry, reveals that identifying and investing in these developing trends early could lead to multi-bagger returns.
Recent market developments, the improving regulatory outlook, and the latest transparency data released by Leafreport confirm the CBD industry has what it takes to become the next disruptive force in the global business world and grow into a multi-billion dollar industry in just a few years. Growth investors, therefore, should pay close attention to this space.
The Industry Outlook Is Promising
Two tailwinds are driving the CBD industry forward.
First, the many use cases of cannabidiol are taking the industry mainstream. Data from CBI Insights reveal that CBD products are used in the following business sectors.
- Health and wellness
- Food and beverages
- Pet industry
The wide variety of use cases available for cannabidiol will help the industry grow as consumer awareness grows toward these products.
Second, the maturing nature of the industry which is evident from the latest data released by Leafreport gives reason to believe that consumer engagement will increase in the future as products are now becoming trustworthy. The chief executive officer of Clever Leaves, a company that produces medical cannabis, believes that transparency is one of the key considerations of CBD buyers. In an interview with Forbes, he said:
“Consumers are getting more savvy on the benefits of CBD and they will begin to insist on knowing exactly what they are paying for and what they are getting when they purchase CBD products.”
Leafreport revealed in a report that out of the 36 CBD products tested in its study, 26, or 72% of products, had CBD levels within 10% of what was stated in the label of these products, which is considered as a sign by many industry experts that the manufacturer is delivering the promised goods. The industry, in fact, has come a long way to overcome the transparency issues faced as recently as 2018.
The Improving Regulatory Outlook
The legalization of cannabis is critical to the continued growth of the industry. Canada became the first G20 nation to legalize the use of cannabis products in 2018, and this led to a monumental shift in the market sentiment toward the CBD industry. Since then, the United States has made some noteworthy moves to approve the use of cannabis products for medical purposes.
According to data from the National Conference of State Legislatures, a total of 33 states in the U.S. and the District of Columbia, Guam, Puerto Rico, and U.S. Virgin Islands have approved publicly available cannabis programs. The U.S. Food and Drug Administration, on the other hand, is currently working in unison with the leading companies in this space to fast-track the approval process of cannabis drug products.
Elsewhere in Europe, Luxembourg is set to become the first country in this region to legalize the use of cannabis. This could mark the beginning of a new wave of optimism regarding the regulatory outlook for CBD products in the all-important European region.
As the industry matures, the transparency and accuracy of CBD products are bound to improve. This, in return, will be leveraged by industry participants to push regulators to speed-up the approval process of cannabis products around the world.
Best CBD Stocks To Buy
It’s always a prudent idea to invest in the leading companies of a young industry as these first movers often build economic moats that bring in sustainable earnings in the long run. Here are three such stocks to consider.
Aurora Cannabis Inc. (ACB)
Aurora Cannabis is one of the first players to enter the CBD industry and is among the leading companies in this sector as well. The primary business activity of the company is producing and distributing medical cannabis products. However, the company has diversified its business operations to sell vaporizers and herb mills as well, in a bid to boost its market dominance. Aurora’s recent investment in Reliva, a U.S. CBD company, is an indication of its plans to grow inorganically as well, which might prove to be rewarding in the long run.
Shares have remained under pressure in the last 12 months primarily as a result of macro-economic headwinds facing the cannabis industry, including the oversupply of legal cannabis in Canada and the black market that sells the same products at fraction of the cost. To counter these threats, Aurora launched a budget-friendly product line in February with prices as low as $5/gram with high THC potency.
This move will help the company face it off with illegal products, and consumers now have little incentive to purchase cannabis products from the black market. The company management has emphasized its commitment to bringing low-cost products to the market in the coming months as well, which should help Aurora establish itself as a top contender for the market share in the cannabis industry.
New store openings in Canada were delayed as a result of the spread of Covid-19, and this was a direct hit to Aurora’s strategy of expanding its scale to establish its presence in important regions such as Ontario. However, as the country reopens for business in the coming weeks, the regulators expect to authorize up to 20 new store openings per month. These new physical locations will boost the revenue of the company.
Aurora Cannabis has reported stellar growth in the last three years, supported by favorable macro-economic conditions. The company reported just $1.1 million in revenue in 2016 but in the last 12 months, Aurora brought in more than $217 million in revenue. This goes on to reveal the high-growth nature of its business operations.
Even though Aurora has a long way to go to become a profitable company, this can easily be achieved if revenue growth remains at elevated levels for a few years, which is likely to happen. The new store openings, low-cost products, and its acquisition of Reliva that allows them to enter the American market will act as catalysts for Aurora to become profitable in the next few years, and shares will follow earnings and trend higher in this period.
Canopy Growth Corporation (CGC)
Canopy Growth is another leading player in the industry that was hit hard in recent months. The company remains focused on optimizing its cost structure to improve margins and its focus is on introducing novel products such as cannabis-infused chocolates and beverages into the market. This strategy will likely help the company generate attractive revenue growth from its stores in Canada.
Canopy Growth is the largest cannabis player in Canada, and the company is capitalizing on its scale to reach new customers. Even though the company has grown its revenue from $1 million in 2014 to $283 million in 2019, the first calendar quarter of this year was disastrous as the company could not keep its stores open as Covid-19 continued to wreak havoc.
Similar to many other companies operating in this sector, Canopy Growth failed to gain momentum in recreational cannabis sales and reported a decline of 28% on a year-over-year basis in the first quarter. In addition to Covid-19, the strong black market in Canada played a major role in this decline. To overcome this threat and the oversupply in the market, Canopy Growth has decided to reduce production capacity by 40%, which seems to be the right decision to stabilize prices and reduce operating costs.
In other measures aimed at improving operating margins, the company is reducing its headcount by 200 employees in Canada, the United States, and the United Kingdom. These bold measures are required to ensure the sustainability of the business and the company was criticized by many analysts in the past for not taking these steps. The company decided to shut down its hemp farming operations in New York as well. Because of the uncertain regulatory condition in the U.S., the company is now focusing more on its core markets such as Canada, which is a positive sign.
The company will unlock many growth opportunities through the novel products introduced into the market. Canopy Growth is aggressively pursuing opportunities in the cannabis-infused food and beverage market and the cosmetics industry, and this will set them apart from the competition in the coming years.
As business activities return to normalcy in Canada, Canopy Growth’s increased focus on this region will start paying off, and that would be the catalyst to drive the company forward in the coming years. Concentrating on its top market is a good strategy rather than to invest millions of dollars in all of its target markets when there’s a significant level of uncertainty surrounding the regulatory approval of its products.
A quick look at the liquidity position of the company reveals that Canopy Growth will not be exposed to any liquidity traps at least until the end of this year as the company had more than $1.4 billion in cash as of March 31. This strong financial position will play a key role in helping Canopy Growth survive these difficult times and this is a luxury many new cannabis companies do not enjoy.
As many investors continue to look at the short-term woes, a contrarian investor might find Canopy Growth shares an attractive investment as the company is finally making important changes to its business structure that could help consolidate its leading position in Canada.
Aphria Inc. (APHA)
Aphria is another cannabis company with a strong liquidity position. The company is betting on its store openings across Canada to bring in meaningful revenue in the coming quarters and is one of the few companies that have continued to emphasize the importance of a strong omnichannel presence, which might play to the advantage of the company in the future. Aphria is investing to improve its e-commerce platforms, which is the right thing to do to address dynamically changing consumer habits.
The online presence of the company, in fact, helped report better-than-expected numbers for the fiscal third quarter that ended in February. While many cannabis companies struggled in this period, Aphria reported a 64% increase in net cannabis sales for fiscal Q3, which was driven by the sale of recreational cannabis products. This sets Aphria apart from other cannabis companies as its dependency on medical cannabis products is below the industry average.
Even though the majority of cannabis companies operating in Canada suffered from the oversupply in the market, things were different for Aphria in the previous quarter as the demand for its products far exceeded supply, which was confirmed by the management by highlighting the fact that the company had to buy cannabis from the wholesale market to cater to the additional demand. This is a very positive sign for investors and is proof that Aphria is slowly but surely grabbing market share in this billion-dollar industry.
Aphria is in good shape from a liquidity perspective as well. There are no debt maturities scheduled for this year and the company has a cash balance of over $500 million.
Aphria’s business strategy is to price its products low to gain market share in this competitive industry and to improve its online presence. Going by the recently reported financial results, this strategy seems to be working. The expected increase in its market share will drive future earnings of the company. This, coupled with the expected revival of the Canadian cannabis industry in the latter part of this year, makes Aphria a good investment at the current price levels.
The CBD industry is benefiting from various macro-economic tailwinds and many companies representing this industry are increasingly focused on developing high-quality products that meet agreed-upon standards in testing and manufacturing. As the transparency of CBD products increases, so will the market value of the industry. The industry is on pace to mature in the next couple of years, which makes now the best time to be betting on the shares of companies that are driving the CBD industry forward.