The cannabis industry – a shrewd investment or just pot luck?

In December 2018, Altria, a tobacco giant, announced that it was spending $1.8bn to buy a 45% stake in Cronos Group, a Canadian cannabis firm. News that Altria, the firm which sells Marlboro cigarettes, was dipping their hands into the market boosted Cronos’ share price by 29%.

Altria is not the only business that is trying their hand in this new domain. Public opinion towards cannabis decriminalisation is becoming more liberal, and firms are starting to act on these social trends. With Canada announcing the legalisation of marijuana in 2018, companies within the tobacco and alcohol industry are looking to tap into what could prove to be an incredibly valuable market.

The US cannabis market value alone could be worth between $15.9bn and $21.7bn by 2022

According to The Economist, the market value of the cannabis industry could be between $40-70bn. Neil Gilmer, a research analyst at Haywood Securities, projects that the US cannabis market value alone could be worth between $15.9bn and $21.7bn by 2022. This value is surging due to numerous reasons; chiefly changing regulations as well as significant mergers and acquisitions.

Changing attitudes are reflected in new legislation, namely in 13 U.S. states, all of whom have decriminalised marijuana. This means that possession of personal amounts will no longer be punished with prison time, but large scale production and distribution would. Canada, on the other hand, has become just the second country to legalise the plant, meaning that people can grow their own plants and buy from government vendors. These movements will undoubtedly increase consumption, perhaps at the expense of alcohol and tobacco.

New technologies should provide greater assurance to investors in the cannabis sector. Many within the industry now see Blockchain as a potential form of regulation. The cannabis industry tends to be cash-based, which means there is very little protection for investor’s money. Deregulated cryptocurrencies could become a feasible form of payment as the digital nature of this payment will provide investor protection.

Due to U.S. federal restrictions, public companies are forced to seek capital from Canadian investors

Furthermore, Blockchain enables information to be stored on a decentralised database. Given that the cannabis market will be highly regulated with regards to the chemical composition and quantity, companies can keep up to date with regulations by storing product information within this database. This would enable much more efficient management of supply-chains within the industry.

Some big players would be able to make the most of this supply-chain. Constellation Brands, who own Corona, invested $4bn in cannabis producer Canopy Growth Corporation this summer. They hope to make cannabis-infused drinks. Investors should appreciate the variety of potential products that they would be buying into. A growing number of patients require cannabis for medical use, whilst the vaping and edibles market is also increasing significantly.

Mergers and acquisitions in the industry will continue their stellar growth into 2019. Due to U.S. federal restrictions, public companies are forced to seek capital from Canadian investors through the Canadian Securities Exchange. However, as the market yields more value for the U.S. treasury, these regulations will undoubtedly unwind.

Given that weed is likely to be the next drug to be legalised, alcohol and tobacco companies could strengthen their monopoly power on the recreational drug market

Although this is an exciting new industry, it isn’t without its risks. Personally, I have two primary concerns; one from an investor position and the other from a consumer position. Investors should note that the cannabis market can be incredibly volatile, with many comparing the erratic nature of company stock values to cryptocurrencies. In the long run, this may wane, as cannabis policy begins to normalise.

A worry I have as a consumer is that of monopoly power. It is no surprise that tobacco and alcohol companies are piling investment into the cannabis market. Given that weed is likely to be the next drug to be legalised, alcohol and tobacco companies could strengthen their monopoly power on the recreational drug market. This would mean higher prices for consumers, and a greater chance of government experiencing regulatory capture; where minister’s end up under the thumb of the people they are trying to regulate.

The success of these business moves will depend on future recreational drug legislation as well as changes in lifestyle choices, but the cannabis market is looking an increasingly exciting one for investors in 2019.