By Nick Giambruno, chief analyst, Crisis Investing
The cannabis industry is changing…
What it takes to become successful as a cannabis company in 2019 is very different from what made the first wave of marijuana companies popular with investors.
As you’ll see, it’s a different set of skills. And few companies will be able to compete successfully in this new space.
But those that do stand to win big… as do investors in those companies.
And today, I’m going to show you why – and where to look for them…
The New Wave of Cannabis Investing
Just about anyone can grow a marijuana plant on his back porch. A quick Google search will teach you how.
So from a practical standpoint, the barrier to entry to producing dried cannabis is low.
It is called “weed” for a reason after all.
Now, the cannabis industry is maturing. And it’s more important than ever to be selective about the kinds of companies you own.
You only want companies in your portfolio that have a sustainable, competitive advantage. And as we head into 2020, that means companies involved in cannabis oils and extracts.
Major Change Equals Huge Opportunity
More and more medical products use cannabis oil these days. These products need standardized doses. And they need consistent quality.
It’s not easy to produce cannabis oil with consistent quality. It takes a lot of money and know-how. (That goes for both the technology and the chemical processes the technology is based on.)
Today, the market for oil-based products (like edibles) is larger than the market for dried flowers.
This explains why the cannabis industry is moving in the direction of oils and other extracts.
This is a major change in the market. And it presents a huge opportunity for smart speculators.
But before we get to that, you should understand why the industry is changing…
From a Specialized Niche to the Core of the Cannabis Industry
Cannabis oil companies have rich margins and high returns on capital.
Even early-stage companies focused on extracts boast margins comparable to those of large-scale dry cannabis producers.
Here’s a quick example: In 2018, dried cannabis flower cost, on average, about $7.50 per gram. It costs about $1.80 to grow it, so the gross margin is about 76%.
For oils, the margin was about 84%. And for edibles containing them, the margin was about 92%, according to cannabis research and media firm Grizzle.
The chart below shows this:
This explains why, in legal cannabis markets, products derived from cannabis oils – such as various forms of edibles – have recently come to dominate the market.
Take Colorado. It was one of the first states to legalize recreational use of cannabis. Sales of dried cannabis flower there dropped from 67% of the total in 2014 to about 44% at the end of 2018.
Other states that legalized marijuana see a similar pattern.
In the U.S., most cannabis – 64%, to be precise – will be consumed as concentrates and edibles by 2022, according to a 2019 report by BDS Analytics.
But that’s just a taste of what’s to come for the cannabis extracts and oils industry…
The Next Wave of Profits
There are over 113 chemical compounds in the cannabis plant. We only know a little bit about two of these, and just those two (THC and CBD) show enormous medical potential. That says nothing about the other therapeutic, recreational, and additional commercial value they may have.
THC (tetrahydrocannabinol) is the psychoactive component that gets users high and has medicinal properties.
CBD (cannabidiol) has medicinal and therapeutic properties and no intoxicating effects. (You may recall the story of Charlotte Figi, a little girl with severe epilepsy whose life changed after her doctors prescribed CBD oil.)
After President Trump legalized hemp at the federal level last December, hemp-derived CBD exploded.
In fact, the worldwide market for CBD hemp oil is estimated to grow over 30% per year over the next five years.
And in 2024, global sales of CBD hemp oil will reach $760 million, up from an estimated $150 million in 2019, according to a new study done by Global Info Research.
This is great news for the companies that make these oils and extracts products… and their investors.
But now there’s more…
113 Cannabinoids, Thousands of Combinations
There are at least 111 other lesser-known cannabinoids that practically nobody else is talking about. These are just a few which show massive potential:
Cannabigerol (CBG). This cannabinoid is present in younger cannabis plants. Like CBD, CBG has therapeutic value and is non-intoxicating. CBG may suppress cancer cell growth, reduce seizures, reduce pain, and help with insomnia. It has anti-bacterial and anti-fungal properties.
Cannabinol (CBN). This compound has the potential to suppress the immune response of the body and has anti-inflammatory properties. It can help treat psoriasis and burns and can also be used to help heal broken bones. It also can increase appetite but, unlike THC, which also stimulates appetite, CBN is not psychoactive.
Tetrahydrocannabinolic Acid (THCA). THCA is one of the most abundant cannabinoids found in the cannabis plant. It is a precursor to THC. To get from THCA to THC, you need to heat it. THCA isn’t psychoactive, though. THCA can reduce nausea and vomiting and has anti-inflammatory and neuroprotective effects.
Cannabichromene (CBC). This cannabinoid is thought to be one of the most abundant in the plant. It works best as a “sidekick” to other ones by enhancing their effects. But it has its uses, too. Among them, it has anti-fungal and anti-bacterial qualities. It also helps promote neuron production in stem cells, according to a study done in 2013 in Italy. CBC also has the potential to reduce gastrointestinal inflammation.
Tetrahydrocannabivarin (THCV). THCV is like THCA and THC, but it has some unique qualities. First, it can suppress appetite, not increase it. Second, some studies showed that it could help regulate insulin and blood sugar levels. It also stimulates bone growth and is believed to reduce panic attacks.
Cannabidiolic Acid (CBDA). CBDA is a precursor to CBD. One of the critical features of this cannabinoid is that it’s thought to reduce cancer cell growth. It can also help patients struggling with nausea and inflammation.
Just think of how big the cannabis boom has been so far… and that’s only with our minimal knowledge of just THC and CBD.
That’s why cannabis extracts are so crucial. They’re what allow us to isolate and study each of these 113 chemical compounds, and the thousands of combinations of them.
The true potential of all 113 cannabinoids – and the thousands of combinations of them – is truly mind-boggling.
That’s the opportunity today. It’s the cutting edge of the cannabis industry and the key to the next wave of profits.
The implications for cannabis extracts and the medicinal benefits of cannabinoids are clear. While the demand for oils and other extracts is growing, production capacity is still catching up.
This means first-mover companies have a competitive advantage.
I have no doubt the companies specializing in cannabis extraction represent the next major opportunity for cannabis investors.
And the time to get positioned is now.
Chief Analyst, Crisis Investing
Chris’ note: As Nick said above, we’re on the cusp of the next boom in cannabis… and he believes it will be five times bigger than the previous one.
Plus, he’s pinpointed the event that he thinks will send hundreds of billions of dollars flooding into the space… and turn today’s penny pot stocks into blue-chip companies.
Investors who get in now could make a fortune. I share all the details right here.