Cowen and Company joins the ranks of the few mainstream research firms to officially begin covering the cannabis industry. A comprehensive 100 plus page report with contributions from ten different analysts was issued by Cowen Washington Research Group on September 12.
The Cowen group is forecasting that the marijuana market will grow to $50 billion by 2026 from $6 billion today. They believe that there will be a huge transition of black market sales to the legal market as more states legalize marijuana and that more people may engage in marijuana use as it becomes more acceptable and legal.
However, when institutional, mainstream corporate companies dabble in marijuana, they do tend to show their naivete about the industry. The inclusion of Jack in the Box as a suggested stock to benefit from marijuana was flat out ridiculous and insulting to the marijuana community. While empty shelves of Doritos made the news when marijuana was first legalized in Colorado, most users can buy strains without hunger effects.
“That Jack in the Box thing was stupid,” said Alan Brochstein, Founder of 420 Investors. He did add, “The value of the report is for institutional investors that can't really invest in marijuana. It's good to be aware of what's happening. Like it can be good for tobacco and bad for alcohol.”
Surprisingly, analyst Vivien Azer recommended a fairly small stock in the space. This is pretty unusual as large investment firms tend to avoid small stocks. The reason is that when an established firm speaks favorably of a stock, no matter the size, there is a bump in buying activity and when the stock is small it can create volatility because of liquidity issues.
Azer believes that Kush Bottles Inc. is the best opportunity in the consumer staples space to capitalize on the cannabis industry. Kush is a distributor and manufacturer of packaging solutions for the cannabis industry. She initiated coverage with an outperform rating and a $3 target.
“I'm not sure why they called out Kush. I like Kush, but $3 is ridiculous. It's not defensible,” said Brochstein. The stock was lately trading at $2.13.
She also noted that alcohol consumption among men has fallen 10 bps in the last five years and a shift from alcohol consumption to marijuana use could negatively affect beer companies like Molson Coors Brewing Company and Brown-Forman Corp., while benefiting tobacco brands. Big tobacco is keeping a close eye on the industry and many players believe that as soon as it becomes legal nationally, they will jump in with both feet. Smoking has continued to drop and they need to replace those customers with new business.
“Big tobacco could leverage its expertise to explore the legal cannabis market through vapor,” said Azer. “Our bull case assumes big tobacco achieves a ~20% market share in overall cannabis, which by 2036 would have cannabis adding over 20% to the top line and nearly doubling tobacco's underlying growth.” She also noted that regulatory expertise and consumer overlap are nice advantages. Azer has outperform ratings on Reynolds American and Turning Point Brands, which makes Zig-Zag cigarette papers.
On the internet side, analyst Kevin Kopelman highlighted four categories for investors to consider. They include delivery services, online content, online shopping and online medical evaluations. The companies he suggests and highlights are all private. He noted that the company Eaze is an early leader in delivery services. Kopelman pointed out that many customers may feel uncomfortable going to a storefront and the at home delivery is convenient and discreet.
Leafly,a privately-owned company is often called the “yelp” of marijuana and Weedmap are two companies he mentioned as as becoming dominant in this nascent field. Kopelman failed to mention any publicly traded cannabis industry software companies.
When it comes to medical marijuana, there are more established biotech companies for the analysts to recommend and an area where it seemed they felt more comfortable. Analyst Doug Schenkel reviewed the life science tool aspect, which covers the testing of cannabis products. “We believe the cannabis testing opportunity can plausibly represent a ~$100-500 million opportunity for life science tools companies over time,” he said.
Schenkel believes its an opportunity for all the companies that participate. That includes Agilent, Merck, KgaA, Perkin Elmer, Shimadzu, Thermo Fisher and Waters Corporation on the liquid chromatography and gas chromatography testing side. For mass spectrometry testing, the beneficiaries include Agilen, Bruker, Danaher, Perkin Elmer, Thermo Fisher, Shimadzu and Waters Corporation.
On the biotech side, analyst Phil Nadeau likes GW Pharmaceuticals the best, although he did also highlight Insys Therapeutics, Canada's Tilray and Zynerba. Nadeau did a deep dive into GW Pharmaceuticals and skimmed over Insys, which was probably the right call since the company just saw its CEO resign. Zynerba uses a synthetic CBD formula and he noted the company is in a Phase II study.
Even though Tilray is a private Canadian company Nadeau covered the company's current studies in good detail. He noted that Tilray is also conducting a study of 1,000 medical cannabis users at 20 survey sites. The company is also leveraging Leafly's database to find which products people are using for self-treatment.
It was pretty clear the analysts were trying to tie in to their industries, but the focus was not on companies that are really in cannabis,” said Brochstein.
Overall, a well-written and researched report on the cannabis industry. In the future though, they can skip the fast food recommendations.
