When looking for the ideal cannabis investment, there are two important factors to note. These include a company's production capacity and, equally important, production diversity.
A good, well-rounded company will have both of these areas ticked.
Let's check this out.
Cannabis Investment - Production Capacity
When it comes to cannabis producers, production capacity is like the flag on a pirate ship; the bigger it is, the more of a threat you are.
Yes, it's straightforward; the more cannabis a brand produces, the more it can deliver. This makes it reliable and potentially further reaching.
In a market facing ever-growing demand, keeping up with production capacity can be the difference between those who sink or swim. There is a strong demand in Canada, and the opportunity overseas are also booming.
"Top-tier growers" such as Canopy Growth (NYSE:WEED)(TSX:WEED) and Aurora (NYSE:ACB)(TSX:ACB), are landing long-term supply deals that bring lucrative and constant revenue streams. And it's not by chance—both have an annual yield of 525,000 kg and 700,000 kg respectively.
So production capacity is meaningful, and it is one thing investors should look for when investing in cannabis, but it is by far the only thing.
Cannabis Investment - Production Diversity
There is another equally important factor to consider when hunting for that all-round solid cannabis investment and that is product diversity.
Consider this: What happens if a cannabis glut happens and the price per gram falls dramatically. What happens a company's margins, in that case? And importantly, what happens to your investment?
If growers don't diversify their product lines, then they run the risk of watching their operating margins shrink. This is because dried cannabis may easily become commoditized across Canada if there is an oversupply of the stuff. If this happens, the price per gram falls drastically and growers lose their profits as they fight to maintain supply deals.
Because we are still only 1 year into a newly industrialized industry, it's hard to predict if this will be the case, or if it is already going that way.
Edibles, Oil, Concentrates
But by diversifying away from dried cannabis, a company gives itself high-margin alternative products that also speak to medical patients and those who detest smoking.
These products are much less at risk of commoditization and usually demand higher sale prices which mean larger profit margins. This includes concentrates, edibles, drinks, creams, oils, you name it.
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Preempting the next chapters in this nascent industry is as important as being able to provide for the current one. With the edibles market upon us, there is a lot of diversity needed.
Canada is expected to legalize most alternatives in the latter half of 2019, so if a company hasn't already added some form of concentrate to its line, it may fall behind. Those that have, will be in considerably better shape over the long run.
Looking for cannabis investment potentials, there are several prominent brands that have diversified their lines as well as hold up strong annual production yields. Some of our favorites include:
Aphria (NYSE:APHA)(TSX:APHA)
Aphria is expected to produce a whopping 255,000 kilos of dried cannabis in peak output by 2020. But the company has also constructed an extraction center capable of producing over 25,000 kilograms-equivalents of concentrates. This center is purely focused on concentrates and a product line that deviates away from dried flower.
OrganiGram Holdings (TSXV:OGI)(OTCQX:OGRMF)
This company has an expected annual yield of 113,000 kg which keeps it in the top ten but doesn't quite hold a candle to Aurora's 700,000 kg.
But what has us loving Organigram is its several strategic partnerships overseas and at home. It is capitalizing on the growing CBD and international markets with partnerships in Germany and Serbia.
At home, it has paired up with Smartest Kitchen to make cannabis-infused chocolate edibles. Also in Canada, it has partnered with biotech company Hyasynth, to develop pure CBD at half the cost of extracting from plants.
All this means Organigram is able to serve several arms of the cannabis industry at home and overseas, and this ensures longevity.
HEXO Corp (NYSE:HEXO)(TSX:HEXO)
By now, most investors are already excited for HEXO's involvement in the cannabis-infused drinks space thanks to its partnership with beverage giant Molson Coors (NYSE:TAP). The pair will produce CBD-infused beverages through a newly formed joint venture company called Truss.
But akin to that, Quebec's HEXO is on the verge of its own line of edible products. It has hinted at potential partnerships with major companies across the food, cosmetics, and tobacco industries.
The company remains boastful of a 108,000 kg annual yield and a lucrative supply deal with its home province which secures it a 35% of that market.
Are there any other key factors you look for when choosing a cannabis investment? What companies are on your radar and why?
Let us know!
Featured Image: Deposit Photos/shmeljov
