THC. It flows off the tongue much more easily than "tetrahydrocannabinol," the full name of the chemical. THC is the primary chemical responsible for marijuana's psychoactive effects. And it may be the primary reason several marijuana stocks could have staying power.
Canopy Growth (TWMJF +0.00%), Aurora Cannabis (ACBFF 0.59%), and Aphria (NASDAQOTH: APHQF) rank as the biggest pure-play marijuana stocks on the market right now. They just might remain at the top for years to come, thanks in large part to -- you guessed it -- THC.
Image source: Getty Images.
Tobacco road?
One of the most successful stocks of all time might be a bit surprising. Since 1970, Altria (MO +2.36%) has racked up a gain of nearly 29,000%. Altria ranks among the world's largest tobacco companies, with its products including Marlboro cigarettes and Skoal smokeless tobacco.
What makes Altria's performance especially impressive is that this huge gain came after the U.S. government required tobacco companies to put warnings on their products. It came after tobacco companies were banned from advertising on television.
A key reason Altria (and other tobacco stocks) continued to perform so well was that tobacco contains nicotine. This addictive chemical caused many customers to keep buying Altria's products year after year. And even as the numbers of smokers declined, Altria was able to easily raise prices without much worry that the remaining smokers would quit buying Marlboros.
Marijuana doesn't contain nicotine, but it does contain THC. While THC isn't nearly as addictive as nicotine, as many as 30% of marijuana users can become dependent on the drug because of the chemical, according to the National Institute on Drug Abuse. And for those who don't become dependent on marijuana, the effects of THC, including euphoria and stress reduction, provide ample reason to use the drug more.
It's not hard to envision marijuana growers taking a somewhat similar path as tobacco companies like Altria did. Even if there are some bumps along the way, demand for marijuana should be sustainable over the long run.
Staying power
Right now, Canopy Growth, Aurora, and Aphria only provide medical marijuana in Canada and a few other countries. While those markets are growing, patients must have prescriptions from healthcare providers to buy medical marijuana. This requirement limits the marijuana growers' ability to expand within their home country.
That's probably about to change, though. Canada is on course to legalize recreational use of marijuana this summer. Estimates for the recreational market range from $4.2 billion to $8.7 billion. Considering that the largest medical-marijuana grower, Canopy Growth, made revenue of only $47 million over the past 12 months, the opportunity is enormous.
Once the floodgates open for recreational marijuana, it seems quite likely that Canopy, Aurora, and Aphria will dominate the industry for a long time to come. The key to success will be production capacity.
Image source: Getty Images.
All three companies have been scrambling to increase their capacity to serve what is expected to be a huge demand. Aurora Cannabis recently agreed to buy CanniMed Therapeutics for $1.1 billion (in Canadian currency) after a bitter battle raged for several months. The company went through the ordeal to gain additional production capacity.
Of course, at some point production capacity will catch up with demand. That's when brand recognition and marketing prowess will become much more important. What happened in the tobacco industry is that, for the most part, the early leaders remained leaders. They were able to use the cash generated from higher market shares to invest in building their brands. I expect that's exactly what Canopy, Aurora, and Aphria will do.
Canopy Growth already has a partnership with rapper Snoop Dogg. In 2016, the company launched three varieties of dried cannabis strains under the Leafs by Snoop brand. Don't be surprised for more celebrity deals to be made by Canopy and other major marijuana growers in the future.
Challenges to longevity
In the 1950s, Liggett & Myers ranked as one of the top tobacco companies. But Liggett & Myers no longer exists as a standalone company. After it changed ownership a couple of times, Altria bought it in 1999. Why do I mention Liggett & Myers? Because I think the tobacco company's fate could illustrate the greatest challenge to longevity for Canopy Growth, Aurora Cannabis, and Aphria.
There has already been a sign that large companies are eyeing the Canadian marijuana market. In October, Constellation Brands (STZ 1.45%) paid $245 million for a 9.9% stake in Canopy Growth. The two companies also are partnering on the development of a cannabis-infused beer.
Constellation's investment has already paid off handsomely. The large alcoholic beverage maker's interest in Canopy Growth is now worth around $475 million. A return of more than 90% in three months is very good.
Could more large players look to buy these top marijuana growers, either in whole or in part? I think so. And I suspect the probability of acquisitions will skyrocket if the U.S. legalizes marijuana at the federal level at some point down the road.
But there is another threat to longevity that could also come from big companies. If a large organization decided to buy several smaller marijuana growers instead of one of the "big three," it could present a formidable rival. Remember that supply will eventually catch up with demand. A much larger company would have even more financial resources to pour into marketing and brand building than Canopy, Aurora, and Aphria would be able to do.
Ultimately, marijuana is a commodity -- just like tobacco. The companies that survive and thrive must be great at marketing. It's possible that the current leaders in the Canadian marijuana industry will face others that are better at marketing than they are.
The next Altria?
The one thing that I don't think Canopy Growth, Aurora Cannabis, or Aphria have to worry about is demand going away. THC will help make sure that doesn't happen.
Could one of these marijuana stocks become the next Altria? Maybe. At this point, you'd have to give an edge to Canopy Growth in potentially dominating for years to come. Canopy has the production capacity and already has a solid marketing strategy.
However, there is another scenario that could unfold. I've thought for quite a while that major tobacco companies could be making plans to enter the marijuana market. It makes a lot of sense, considering the similarities between the marijuana and tobacco industries. Perhaps Aurora or Aphria will become the next Altria -- by becoming part of Altria. Stranger things have happened.
