Alison Southwick: Are there a couple of specific company names or stocks that you want to put
out there for any listeners that want to start looking into the industry?
David Kretzmann: Sure.
[Within] the initial companies that we've recommended to people as buy recommendations,
we have the pure plays.
These are companies that generate the majority of the revenue from cannabis in some shape or form.
We then have picks and shovels companies.
Picks and shovels companies we have identified as companies that have a strong, underlying
core business that isn't in cannabis, but then the potential opportunity with cannabis
is an add-on, or a cherry on top, but it isn't the main thesis behind buying the company.
Starting with a picks and shovels company, I think Constellation Brands is a company
that some people will be familiar with.
If people have followed this space at all, you might have seen them in the headlines.
This is the company behind Corona, the beer, and then a variety of other wine and spirit
brands that they have in their portfolio.
They've been one of the better-performing alcoholic beverage companies in the past several years;
unlike some of the other bigger players.
Last year they invested a smaller amount into Canopy Growth, which is one of the larger
cannabis producers in Canada.
Then in August Constellation Brands re-upped that investment in a huge way.
They invested an additional $4 billion into Canopy Growth, taking 38% control of Canopy
for the seven board seats.
Essentially Canopy Growth, today, is the cannabis offshoot of Constellation Brands.
To put that number in perspective, in the first half of 2018, every single cannabis company,
public and private, around the world had raised $4.3 billion.
That's the first half of this year, so in a single day, Canopy Growth essentially raised
the same amount that every other company had raised.
This just puts Constellation and Canopy Growth on a whole other level compared to other companies.
So from a picks and shovels angle, I like Constellation Brands because this is a company
that pays a dividend.
They generate an increasing amount of free cash flow, so it's a healthy business.
They have a strong core business, but they're also making a fairly aggressive push into cannabis.
During the announcement of this investment, they said that they expect the legal cannabis market,
on a global scale, to hit $200 billion by 2030, so they see this being a big opportunity
and they're making a substantial bet on it. That would be the type of company that I start with.
It's a business that's easy to understand.
You can see where cannabis could complement Constellation Brands because they have a lot
of experience building brands and distribution with a highly regulated product like alcoholic
beverages, and it makes sense that they could transfer that knowledge over to cannabis
in the coming years.
And I like the fact that they're taking a long-term approach to this.
They're not investing cannabis to juice their share price in the short term.
They're very much thinking of this from a decade-long perspective, and I think that's
the right way, as Foolish investors, we should be thinking.
With pure play companies, these are obviously much riskier companies.
Like I said earlier, a lot of these companies are burning cash, they're unprofitable,
and the valuations are likely going to be very lofty no matter which way you slice it.
But one company that I do like that's a pure play cannabis producer in Canada is a company
called CannTrust. This is a company that's still valued at over $1 billion.
Their revenue over the past year is still pretty minimal, but they've registered among
the most medical cannabis patients in Canada compared to the other bigger producers.
And even though their valuation does sound lofty -- like $1 billion for a company that
generated about $30 million in revenue over the past year), that valuation's actually
really attractive compared to Canopy Growth, or Tilray, or Aurora Cannabis, or some of
these other bigger players.
I'm not making a valuation argument, necessarily, but compared to some of these other bigger players,
I think it is a more attractive price.
They also have a partnership in place with Breakthru Beverage, with is one of the largest
private companies in the U.S. and that's a company that is one of the leading beverage
distributors in North America.
So in the coming years, potentially, CannTrust will be able to plug its cannabis products
into that distribution network of Breakthru Beverage. It's a founder-led company.
They have a healthy balance sheet.
Again, this is one where it would still be incredibly volatile, but I like the approach
the company is taking.
When I spoke to their president this summer, he said, "In 18 months or so, I hope
that we're not in the business of growing cannabis."
Because when you think about it, no one cares about who grows the coffee for Starbucks or
the tomatoes for Heinz. People are really just interested in the end product.
So the long-term vision for CannTrust, and also some of these other companies, is really
in building brands, because at the end of the day when you're dealing with what could
potentially become a commoditized crop like cannabis, the greatest value to be captured
will be from the companies that can build those brands that resonate with the end consumers.
So just as you see Anheuser-Busch or Budweiser with alcohol, or Starbucks with coffee,
or Heinz with tomatoes, I think you're going to see, in the coming years and decades,
some pretty powerful global brands be built in a similar way around cannabis and I like the
approach that CannTrust is taking to get there.
It's not a slam dunk that they will, but I do like the approach that they're taking.
So that's one that I look at as a promising pure play company.
Southwick: What if I just want an ETF? Kretzmann: There are a few ETFs out there.
Again, limited track records, there, because there hasn't been much of a track record
to have in this industry.
The one danger with the ETFs is that they're often highly concentrated in the bigger players,
and I would say that most, if not all, of the bigger players are trading at some frothy
valuations at potentially unsustainable levels. So you still want to understand what you're buying.
I wouldn't blindly buy an ETF.
First you'd want to see what their concentration is in the top 10 holdings -- what those companies are --
and if you're comfortable with the idea of having the majority of that ETF be
in some of those bigger players.
For me, personally, if you are looking to get exposure to this category, start with
a company like Constellation Brands, a more established multinational company that is
looking to make some investments in the category.
And then if nothing else, the approach that we're taking, here, at The Motley Fool with
our cannabis-investing recommendation service is we're almost building our own ETF; so recognizing
that this is a type of industry and given that it is at such an early stage where there
will be plenty of losers in the coming years. You're going to see some consolidation.
You'll see some companies that fail to gain traction or just won't be able to raise cash and they'll go bust.
But the thesis that we have, here, is that there will be eventual long-term winners in
the category, and that a majority of the gains will likely come from a small number of winners.
It's almost like approaching a venture capitalist where you're making a series of small bets.
You recognize that probably at least half of those bets won't work out, like the way
you hoped, but there will be one or two big winners that more than make up for the losers.
So with an ETF, you might be able to capture that, but I think over the long term if you
are interested in the space, it makes a little more sense to build a diversified portfolio
among a few of the players and go with that approach.
But to each their own. I would just tread carefully with the ETF approach.
Robert Brokamp: If someone's interested in this, how much of their portfolio do you think
they should devote to these types of companies?
Kretzmann: It should definitely be a small part of your overall portfolio.
Obviously, each person, circumstances, and risk tolerance will be different.
I've personally invested in all 10 or eventually 13 of our recommendations by the time this
podcast is released, so I've invested my own money in the companies that we've recommended
in this space to our members; but I just started with about five percent of my overall portfolio. I'm young.
I am adding more money regularly to my investments, so that's the type of risk that I can afford to take.
Even though 20-40% swings in these stocks, especially the pure plays, isn't all that uncommon
-- it's actually probably more than the norm rather than the exception --
for someone who's in or near retirement, or if they're not adding a lot of money to their investments,
you just want to take a step back and really be sure anything that you
put into the cannabis stocks should be money that you certainly won't need in the next
five years, and shouldn't be a substantial part of your overall portfolio.
I would say when in doubt, start small. There's no rush.
The way that we're approaching it is this will be something that unfolds in the coming
years and decades, and there will certainly be a lot of peaks and valleys along the way.
We'll have a lot of hype like we had around October 17 and legalization day in Canada.
I'm sure if and when the U.S. federal government decriminalizes cannabis on a federal level,
that will be a huge catalyst for the industry, but when in doubt, start small.