The biggest marijuana day of the year is exactly three weeks away. On Oct. 17, 2019, marking the one-year anniversary since recreational marijuana sales commenced in Canada, rules governing the sale of derivative pot products will officially go into effect. However, new products won't hit dispensary store shelves until about two months later.
Derivatives are non-dried-flower marijuana products. Examples include edibles, concentrates, vapes, topicals, and nonalcoholic infused beverages. Prior to Oct. 17, 2019, only dried cannabis flower, cannabis oil, and sublingual sprays were given the green light by regulatory agency Health Canada.
The excitement surrounding the launch of derivatives is easy to wrap your hands around as an investor or business operator in the cannabis space for one simple reason: the margins are juicier. In select recreationally legalized U.S. markets, the oversupply and eventual commoditization of dried flower has led to a steady decline in per-gram dried cannabis pricing, as well as margins. That oversupply concern simply doesn't exist in the derivatives space.
Furthermore, derivatives tend to speak to a newer generation of marijuana-product consumers. With tobacco health concerns better known after decades of research, younger pot users prefer consumption options that don't involve smoking dried flower. That's where derivative pot products come into play.
Among the many alternative consumption options available, perhaps none has attracted more attention from brand-name cannabis stocks and ancillary players than infused beverages. Though there are no shortage of companies angling for their piece of the pie, the following three cannabis stocks are the ones you'll want to know.
Canopy Growth (CGC 10.24%) is not only the largest marijuana stock in the world by market cap, but it's liable to be one of the largest players in the infused beverage business. That distinction is the result of a massive equity investment from Corona and Modelo beer-maker Constellation Brands (STZ 1.51%) that closed in November.
The investment made by Constellation gave the company a 37% stake in Canopy Growth. Obviously, Constellation sees more in Canopy than just partnering up on a line of infused beverages; otherwise, it wouldn't have taken a cumulative $4.2 billion equity stake and purchased approximately $150 million in convertible notes between Oct. 2017 and Nov. 2018. Nevertheless, Constellation Brands is looking for ways to naturally expand its reach into other vice industries, and cannabis is a natural evolution, according to its management team.
This partnership will allow Constellation and Canopy to bring their unique perspectives to the table in creating a line of infused cannabis beverages. Namely, Canopy will be leaned on for its expertise in cannabis, as well as its branding strengths and ability to land substantive supply deals. Meanwhile, Constellation Brands has a history of successful marketing, product innovation, and boasts deep pockets.
It's unclear how much of a needle mover infused beverages will be for Constellation in the quarters to come, but it should be a difference maker for Canopy Growth.
The thing about the cannabis industry is that businesses don't need to be the size of Canopy Growth to be wildly successful at certain niches. New Brunswick-based OrganiGram Holdings (OGI 6.96%), which sports a roughly $650 million market cap, is a perfect example.
OrganiGram is focused on a slew of derivative options. It's one of four suppliers chosen by PAX Labs for the Era vape device, and the company has spent 15 million Canadian dollars on a line of fully automated equipment that will allow for the production of 4 million kilos of infused chocolates each year. But the most intriguing aspect of OrganiGram's derivatives line might just be its nano-emulsion technology that's focused on beverages.
Earlier this year, OrganiGram announced that it had developed a nano-emulsification technology that can be added to beverages to speed up the process by which cannabinoids take effect. The company plans to introduce this technology first as a powder that users can add to an infused beverage of their choosing.
However, OrganiGram has also made clear that it would like to develop a line of infused cannabis beverages with this proprietary technology already built in. It's been actively looking for a beverage partner to help develop and market a nano-emulsification beverage product, and I'd be genuinely surprised if it failed to find one relatively soon.
A third brand-name Canadian pot stock that you'll want to closely monitor as infused beverages begin to roll out is Quebec-based HEXO (HEXO -1.05%).
Even though Constellation's $190 million equity investment into Canopy in Oct. 2017 marked the first foray of a major company into the cannabis space, it's the joint venture between HEXO and Molson Coors Brewing (TAP 0.65%), announced on Aug. 1, 2018, that truly signaled a definitive focus on marijuana products between a brand-name company and a pot stock.
The joint venture, known as Truss, is majority-owned by Molson Coors (57.5% to 42.5%). As with the Constellation-Canopy equity investment, Molson and HEXO plan to lean on each other's expertise to market their infused beverages. HEXO has keen knowledge of growing and processing marijuana, as well as landing major supply deals. Meanwhile, Molson Coors understands how to market beverage products and scale production.
Because Molson Coors is generating more than $10 billion annually in sales, it's unclear how much of an impact infused beverages will have on its top or bottom line. But given its persistent decline in beer market share in Canada, partnering with a brand-name cannabis stock was a must for Molson Coors.
HEXO, on the other hand, should see an even more impactful increase on its sales from beverages than Canopy Growth. Look for 2020 to be a year of impressive sales and margin expansion for HEXO.