Earlier this month Ross and I attended the MJBiz Cannabis Conference in Las Vegas. The MJBiz conference is the largest and longest running cannabis tradeshow in the country. There were several things that struck us about the show and we’d like to take this opportunity to recap them here.
Industry Growth is Real
In June of this year, we attended the Cannabis Expo in New York. That show was well attended, but still dwarfed by the MJBiz conference turnout. According to our sources at MJBiz, attendance toped 16,000 people, which is staggering especially considering that just four years ago, the conference was held in Colorado with just a few hundred attendees. The growth in conference attendance is probably a fairly good proxy for growth in the industry as a whole. Unlike most sectors that experience such a meteoric increase in popularity, we don’t believe the cannabis market is a bubble. The reason is simply that product demand is still outstripping supply, and the demand curve stretches back about 5,000 years. Therefore, we’re fairly confident that the product popularity isn’t going to suddenly disappear overnight. The cannabis industry is here to stay, and it’s growing at a staggering pace.
It’s All About Industrialization
When we were at the Expo in New York, a number of the exhibitors were distributors, pedaling their own brand of oil, ointment, or CBD-based product. In Vegas, however, most exhibitors were service providers or suppliers of industrial farm equipment. Insurance providers, ventilation equipment, industrial lighting, soil and nutrient compounds, plant trays and extraction equipment, and large-scale security systems, were far more prevalent than actual distributors.
The inference is that the industry is preparing to scale. This means that grow and extraction companies will need to have sufficient capacity to produce product with the quality and consistency required by an increasingly savvy consumer, that is not just using the product recreationally, but for medicinal and holistic purposes.
Companies that are Ready for Federal Regulation Will Thrive
This could really be a sub-heading for point number two above. Right now, the cannabis space is basically the Wild West because the industry is operating without federal regulation, meaning that just about anybody can grow and extract product with the proper state licenses. Without federal oversight to standardize processes, procedures, labeling requirements, and quality control, the barrier to entry for companies looking to capitalize on the cannabis gold rush is very low. As a result, there is a glut of cannabis companies providing growing and extracting services and they are not all created equal.
Our long-held thesis with respect to this industry, is that the companies growing and extracting product in accordance with ISO 9000 standards (which are the standards similar to those the FDA would impose if and when cannabis becomes federally regulated), are going to have the best chance of succeeding over time. The reason is because we believe the FDA will have to step in sooner or later, to regulate the industry in order to protect consumers. Once that happens, it will be too difficult for unprepared companies to play catch-up. Accordingly, we believe that the companies that will win tomorrow are the ones investing in infrastructure today.
It’s clear by the number of exhibitors supplying industrial-grade products and services, that the industry is gearing up for FDA regulation and ISO compliance. Our picks in this space reflect our thinking because they all operate at ISO-compliant standards and/or have been advocating for increased federal regulation.
GB Sciences (GBLX), CLS Holdings USA (CLSH), and GW Pharma (GWPH), are still our best picks in the cannabis space.
Institutional Investors are Still Few and Far Between
During the conference, Ross and I attended an investor luncheon, at which the keynote speaker was a fund manager who established a cannabis-investment fund. According to this fund manager, more than 75% of the institutional capital in America cannot invest in cannabis companies, because doing so is outside their charter. However, the reason this particular fund manager decided to establish a cannabis fund, is because he doesn’t believe that prohibition will last. If the FDA were to begin to regulate cannabis companies, and if the FDA begins to approve cannabis based pharmaceuticals, cannabis companies may no longer be off limits to a large number of institutional investors. If that were to happen, money could come pouring into this fast-growing sector, driving share prices of the best run companies.
We strongly agree with this sentiment, and we believe that some form of FDA regulation could begin as soon as 2018. If that happens, a number of cannabis companies could benefit, including our favorites GB Sciences (GBLX), CLS Holdings USA (CLSH), and GW Pharma (GWPH).
A Dearth of Cannabis-Related Public Companies Could Be Good News for Investors
This could also be a sub-heading to point number four above. Because cannabis is illegal on a federal level, U.S. based cannabis companies cannot list on a major exchange like the NASDAQ or NYSE. Cannabis companies are therefore relegated to the pink sheets, which is probably deterring a number of these companies from going public. Therefore, any institutional capital looking to make an investment in the cannabis space doesn’t have a lot of options at the moment. That could turn out to be a significant advantage for the few public companies that are well run, well managed, and have the financial resources to thrive over the long term.
The big takeaway from the conference is that the industry is clearly preparing for significant growth, and we believe 2018 is going to be a watershed year for the cannabis industry.
Disclosure and Declaration
Gregory Harrison, the author of this report is an independent contractor. Mr. Harrison was compensated by Sylva to author this report. He owns, or his family owns, shares of the following companies mentioned in this article: None.
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