Making the Grade

Medical vs. Recreational Cannabis: Where Should I Invest?

It’s an exciting time to be a cannabis investor!

The Horizons Marijuana Life Sciences Index ETF (OTC: HMLSF) is obliterating the broader markets…

Year to date, the exchange-traded fund has more than doubled the performance of tech stocks and blue chips.

But I think its run is far from over. There are plenty of catalysts on the horizon.

We have pro-cannabis legislation – like the STATES Act and the SAFE Banking Act – inching its way forward in Congress.

At the moment, 33 states and the District of Columbia have legalized medical cannabis use.

Ten states and the District of Columbia have legalized adult-use.

But as the days pass, more and more states are looking to join the ranks.

In Canada, medical and recreational use are legal nationwide. And investors are looking forward to the cannabis consumables market going live around October.

So we’re riding the wave of a surging North American market.

But one of the questions I’m often asked by investors is “Should I be focusing on the medical market or the recreational market?”

Both will be tens of billions of dollars. Perhaps even hundreds of billions globally.

The problem is, not every pot stock is equally exposed to adult-use and medical markets. And investors don’t want to find themselves overweight in just one segment of this booming market.

That’s why for this week’s Making the Grade, my team and I dug into the earnings reports of cannabis companies to pinpoint which side of the leaf the majority of their revenue is coming from.

What we found was a stark contrast.

There are companies relying heavily on the burgeoning legal adult-use market. And there are those targeting mainly medical marijuana.

Few companies have a balanced exposure to both.

First up, adult-use…

Now, I’m not surprised that companies we largely identify as producers of cannabis oils and extracts are the most reliant on recreational revenue.

Both Hexo Corp. (NYSE: HEXO) and OrganiGram Holdings (OTC: OGRMF) receive 90% of their revenue from adult-use sales.

National Access Cannabis (OTC: NACNF) receives almost 100% of its revenue from this market.

Last year, Hexo was awarded one of the largest provincial supply agreements. It inked a five-year deal with Québec for a whopping 200,000 kilograms.

This deal to supply Québec’s adult-use market was poised to gobble up 40% of Hexo’s annual production.

Of course, 2018 was a big year for the Canadian licensed producer (LP). It launched a joint venture with Molson-Coors (NYSE: TAP) in August to produce nonalcoholic infused beverages.

Hexo isn’t the only company champing at the bit for the cannabis consumables market to go live in the third quarter.

We’ve had OrganiGram CEO Greg Engel on CannaBiz Now! to talk about this exact topic. But the smaller Canadian LP is already receiving more than 90% of its revenue from adult-use sales.

When I think of premium cannabis, I think of Canopy Growth Corp. (NYSE: CGC). I’m not shocked to learn the majority of its revenue is recreational.

Tweed, Tokyo Smoke, Doja and Leafs by Snoop are all well-known brands.

Not to mention, the goliath has the multibillion-dollar backing of Constellation Brands (NYSE: STZ) to tap into the up-and-coming cannabis consumables market.

And it’s poised to pour into the U.S. with its agreement to acquire Acreage Holdings (OTC: ACRGF) for $3.4 billion. Though that will happen only when cannabis is legalized at the federal level in the U.S.

Now, for those investors looking to target medical marijuana, this is where Aurora Cannabis (NYSE: ACB) and Aphria (NYSE: APHA) shine…

Currently, both companies receive more than half their revenue from the medical side.

Aphria’s not a top-shelf supplier like Canopy. But that doesn’t mean it lacks opportunities. It’s one of the lowest-cost producers in the industry, as is OrganiGram.

But visualizations like these demonstrate why investors shouldn’t be overweight in one cannabis company. You’re likely getting exposure to only one side of the market.

It also shows the value in investing in Canopy with Aurora… Aphria with Hexo… OrganiGram with National Access… or various other combinations.

Sure, they’re competitors. But that doesn’t mean they’re trying to corner the same side of the market.

Increasing your exposure to a variety of companies gives you the best chance to profit as both sides of the market skyrocket.

Here’s to high returns,

Matthew