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  • Writer's pictureAdastra

Cannabis Investing 3: Apricots, Plums, Apriums, Apples, Tomatoes

Updated: Nov 13, 2023

To truly understand investing in the cannabis sector, investors need to analyze the various subsectors. Broadly speaking, investors typically break the sector down into Licensed Producers (LPs) and retail cannabis companies. Canadian producers are the well known companies in the sector, including SNDL (formerly Sundial), Canopy Growth, Tilray and Aurora Cannabis. The Canadian retail companies include High Tide, Inner Spirit (acquired by SNDL) and Nova Cannabis (formerly majority owned by Alcanna, acquired by SNDL).

The producers are still the best known stocks, but over the years we started to see retailers getting listed on public exchanges. In 2020 I invested in Meta Growth, that later got acquired by High Tide. This decision was based on an analysis of producers vs retail that identified that retail was an overlooked but high potential subsector within the cannabis sector.

In my discussions with investors, both in real life and on message boards, I have often compared cannabis stocks across both subsectors. My point was that both retailers and producers benefit from the growth in Cannabis consumption, but retailers have advantages and fundamentals worth due diligence. Most times I got told that I am comparing apples and oranges. While fruits are the right analogy, the comparison is not so simple. Cannabis stocks are more like apricots (retailers), plums (producers) and apriums (vertically integrated hybrids of retail and production). A fourth category is apples, as there are some that are cannabis technology companies. And a fifth would be tomatoes (cannabis pharmaceuticals) which are technically fruits but often used as vegetables.

I use this analogy to highlight a necessary shift in perspective when it comes to the cannabis industry. Cannabis is now a commodity, like potatoes and coffee beans. Pure play producers are in a commodity business, and subject to falling prices and margins. Retailers are more like McDonalds who convert potatoes to higher value French fries, and like Starbucks who brew and sell coffee along with a lifestyle experience.

Many producers are indeed not pure play producers. The well known US Multi State Operators (MSOs) don’t just produce cannabis, but also own dispensaries that sell cannabis products. The same is true for the Canadian LPs. Canopy Growth formerly owned the Tokyo Smoke brand, a chain of 80+ retail cannabis stores across Canada. The majority of stores were run in partnership with the Katz Group, with whom Canopy had a master franchise relationship. Point to note is that these were franchise stores (McDonalds model) as opposed to corporate owned (Starbucks model). The other Canadian LP that has a retail presence is SNDL. They own Spiritleaf, a mostly franchise model retail brand with 100+ stores in Canada. Sundial also indirect ownership of Nova Cannabis.

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The major Canadian retail cannabis companies is High Tide. It has more than 150 corporate owned (Starbucks model) stores in their network. In the US, the large MSOs, including Trulieve Cannabis, Green Thumb Industries, Curaleaf, Verano and Cresco Labs all own dispensaries. The corporate owned model tends to contribute higher margins than franchise owned, because the margins are split in a franchise model.

The established US MSOs are vertically integrated with retail and production. The vertical integration is a source of competitive advantage that contributes to margins. Given the high competition in the cannabis industry, pure play producers and retailers will be at a disadvantage.

It is important to identify the vertical integrated model and highlight the strengths of those with a hybrid retail and production model. For this reason I categorize the high quality US MSOs as apriums. For the Canadian LPs, I have categorized Canopy Growth and SNDL as plums. This is because their retail brands are mostly (or partially) franchise owned, limiting the impact of vertical integration. This distinction between franchise stores (McDonalds model) as opposed to corporate owned (Starbucks model) is the criteria I have used to determine if a retailer can be categorized as vertically integrated aprium.

When it comes to production, I also recommend a broader view on production. Typically, we see production as growing and processing cannabis plant derived products. But producing and selling cannabis accessories is also production that benefits from the trends in cannabis consumption. High Tide produces, distributes and owns brands for accessories. It also owns many of the most popular accessory ecommerce platforms and a wholesale distribution company, providing the benefits of vertical integration. For this reason I categorize High Tide as an aprium. Pure play retailers would be categorized as apricots. In Canada, there was a retail apricot named Fire and Flower, which has closed down.

In addition to Canopy Growth and SNDL, I categorize as plums the Canadian LPs, including Tilray, Aurora Cannabis and Cronos Group.

In the apples (cannabis tech) category, I would include companies like WM Technology (Weedmaps) and Leafly. These are well worth due diligence because they are a hybrid of cannabis and also in the Technology sector, a sector that often commands high valuation metrics.

In the tomatoes (cannabis pharmaceuticals) I would include GW Pharmaceuticals (which was acquired by Jazz Pharmaceuticals for US$ 7.2 Billion) and Arena Pharmaceuticals (which was acquired by Pfizer for US$ 6.7 Billion). Others in the category would be Israel based InterCure and Australia based Incannex Healthcare.

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The following table lists a variety of cannabis companies by the fruits methodology in this article. The list is sorted (mostly) in order of annualized quarterly revenues and includes many of the largest companies by revenue.

As with many of the analyses presented in this blog, this table has information that is intended to provoke thought, further due diligence and knowledge. Many companies don’t fully fit into any category. Tilray Brands is categorized as a plum because it is a Licensed Producer, and the primary contributors to revenue are the two reporting segments for cannabis and distribution. But the beverage alcohol segment makes a good contribution to revenues and is a growing component of the company’s revenues. There are synergies between the cannabis and beverage alcohol segments of Tilray that can contribute growth to the company, as cannabis infused beverages rise in consumption.

Similarly, Village Farms International (Nasdaq: VFF) is categorized as a plum because it is a Licensed Producer. However, further analysis of quarterly results show that the primary contributor to revenue is the produce segment, which sells tomatoes, bell peppers and cucumbers. The Canada and US cannabis segments contribute around half of company revenues.

This leads us to my next article, which uses the Roman Senators and Gladiators as an analogy to highlight the premium awarded to stocks listed on the Nasdaq (the Senate) vs the dog eat dog OTC exchange (the Colosseum).

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Disclosure: I (username Adastra) am an investor not a trader. I am bullish on the Cannabis sector as a long-term investment (2026 and beyond), provided stocks/ETFs are carefully picked based on data-driven due diligence. Of the 16 stocks covered in the Best Cannabis Stocks analysis, I have invested only in my top 3 picks: High Tide, Green Thumb and Curaleaf. But my analysis indicates (without any guarantees) that there is a potential for impressive gains in investing in the stocks best ranked in the analysis, including WM Technology, and Trulieve, which have a dedicated page with detailed analysis in the STOCKS category. I reserve the right to buy or sell at any time any of the stocks mentioned in this blog. I do not short stocks and never will short any stock in a company that makes the world a better place. I do not have insider knowledge of any company covered in this blog. All data used for analysis is from public sources. I have received (as of last update date of this page) ZERO funding for this blog from any of the companies featured in this blog.


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