In many ways, Bruce Linton has it good.
He’s the CEO of Canopy Growth Corporation. Canopy is the world’s biggest cannabis company, with a market cap of £4.6bn.
This time two years it was worth £150m. So clearly he’s doing something right.
He deserves credit for thinking big. He sunk huge sums of money into cannabis production capacity, and did it early. He was building new growhouses long before the stock market woke up to the potential of legal cannabis.
When the market did its sums, and realised there was a £20bn industry up for grabs, it looked around to see who was best placed to profit. And Canopy Growth was right there. Next thing you know, Canopy’s share price is up 2,900%.
The problem for Bruce Linton and the other cannabis industry execs is — where do you go from here?
The cannabis industry is exploding in size. It’s getting decriminalised and fully legalised all over the place, at an accelerating rate. Five years ago only a couple of US states, Holland and Canada were ok with medicinal cannabis.
Now it’s spread across most of North America, and it’s coming to Europe, and all of a sudden it’s coming to the UK too.
So if you’re Bruce Linton… what’s your strategy? How do you plan for the next five years? How can you say what the pot industry will look like?
There are so many variables.
Where will cannabis be legal in five years?
Will Canopy be allowed to export to foreign markets?
What does a legal market for cannabis look like anyway?
Who makes the money — the growers, the distributors, the brands?
Who owns the brands?
What happens to the price of cannabis once everyone’s finished building these greenhouses and supply goes through the roof?
What kind of cannabis will consumers want — cheap and cheerful like beer, or high-end and differentiated like wine?
Will food companies start incorporating it into their products?
Will the big alcohol companies try to muscle in?
What about pharma?
I’m the type of person who likes to have all the information before I make a decision. So I don’t think I’d make a good cannabis company CEO in 2018. I wouldn’t like to be Bruce Linton.
Linton and other pot industry players like Vic Neufeld, the CEO of Aphria, are taking the FOMO (fear of missing out) approach. They’re investing in every opportunity they can see, from retail to pharma to Germany to Lesotho. And they’re buying up rivals.
The whole industry is on a spree of mergers and acquisitions. Some of them are smart, some of them are interesting, some are plain weird.
Some look corrupt — pot companies buying up rivals at strangely inflated prices.
Aphria is worried about getting its products in the stores at eye-level. Its studied up on fast-moving-packaged-goods and it knows that getting your products in the right stores in the right places is crucial. Whoever controls shelving controls the market. So it has tied up with Southern Glazer’s, one of the biggest off-licence chains in Canada. The deal will get Aphria’s cannabis brands in the stores at eye-level. And as Aphria develops its next line of products and its next brands, it can do so safe in the knowledge that it has a good retail strategy.
The brewing industry is nervously watching on. Beer sales have started to fall in North America, coincidentally just at the time that quasi-legal cannabis has come along. Brewers don’t want to be caught on the hop. So they’re starting to buy shares in cannabis companies.
Constellation brands, the £23bn beer giant, bought up 10% of Bruce Linton’s Canopy Growth earlier this year. Now Molson-Coors, which is the second-biggest brewer in North America, is reportedly looking to buy a stake in some of Canada’s biggest growers.
Nobody knows what’s going to happen, and there’s plenty of capital about thanks to generous stock market investors, so everyone is betting on everything. Aphria’s even doing deals in Lesotho, that tiny country which is completely encircled by South Africa.
Todd Harrison runs a hedge fund called CB1 Capital, which is focused solely on investing in cannabis. He has a completely different idea of how this is all going to pan out. He’s completely focused on the medicinal side of cannabis investing.
Harrison’s investment thesis is that the cannabinoid system is on its way to revolutionising medicine. As I wrote two weeks ago,
“The cannabis plant produces more than 100 chemicals called cannabinoids. And it turns out that cannabinoids are an essential part of the human body. We produce them naturally.
They’re like keys — keys to locks which are found in different parts of our anatomy. The keys interact with the locks and tell the different parts of the body how to function. And they’re everywhere in the body. They control everything from pain to appetite, inflammation, brain development, sleep, the immune system, gut health, and a lot more.
The basic idea of medicinal cannabis is that sometimes, the human body doesn’t produce enough cannabinoids (which are called endocannabinoids, because they’re produced endogenously). And that these problems can be fixed with cannabinoids derived from the plant.”
So Harrison’s CB1 capital is investing solely in the medicinal applications of cannabinoids and the cannabinoid system. He argues a) we’re only just discovering what cannabinoids can do and b) that the falling cost of cannabis, due to extra supply, is going to see it incorporated into a whole range of new treatments.
So what should Linton be worrying about? Will he get undercut on price if cannabis turns into a commodity? What about if cannabis products get highly differentiated, like wine, and he hasn’t built up a brand? What about the medical opportunity, should he be tying up with the likes of GW Pharma?
It’s a wild time, an exciting time. I have an opinion about where the industry is going, and which companies are best-placed to profit. But I keep that one for Technology Profit Confidential subscribers.
You can join me today, it’s dead easy. Click here to sign up and see my cannabis investing blueprint.