For some people, the most important moment for the cannabis sector in 2018 was the Canadian legalization of recreational
marijuana. While significant, the events in Canada were overshadowed by a piece of legislation in the United States, and companies
with a strong cannabidiol (CBD) focus like Canopy Growth Corporation (NYSE: CGC), Tilray Inc. (NASDAQ: TLRY), and PotNetwork Holdings, Inc. (OTCMKTS: POTN) are all set
to make a killing.
Why is that? Well it’s all thanks to a little thing called the Farm Bill.
The Farm Bill has opened an incredible opportunity
The Farm Bill could well be one of the most significant pieces of legislation to come out of US President Trump’s
administration. For the first time, it removes all cannabis fibre products, like hemp, with a tetrahydrocannabinol (THC) content of
less than 0.3% from the Controlled Substances Act.
This means that it is now legal to manufacture, distribute and sell hemp-derived CBD products on a federal level. CBD is widely
used in pain and stress relief and was recently permitted for use in sports by the World Anti-Doping Agency.
In short, overnight the government has legalized a market predicted to be worth $22.2 billion by 2022. Thanks
to the Farm Bill, the CBD market is set to grow faster than any other cannabis sector.
Prior to the Farm Bill, the CBD sector was quietly building up, and this has put a handful of companies in a strong position to
take advantage of emerging opportunities.
Canopy Growth Corporation
Canopy Growth Corporation is one of the biggest players in the cannabis sector. The company has received a huge show of
faith in the form of a $4 billion investment from beverage giant Constellation Brands Inc (NYSE: STZ).
The move was designed to help strengthen STZ’s position as a first mover in the THC and CBD-infused beverages sector.
Constellation’s investment marks the largest
cannabis investment to date and gives an idea of where Canopy Growth is heading.
Canopy’s potential has not gone unnoticed by analysts. Piper Jaffray recently raised the company’s price target from $40 to $60
while maintaining an outperform rating on the stock.
The analyst cited the potential opportunities opened by legalization, but another part of the puzzle is CGC’s CBD growth
strategy. On January 8th, the company outlined its plan to use the farm bill to
make its entry into the US market.
The company can produce 7,000 kg of hemp-derived CBD per year and has access to a significant amount of hemp-specific IP through
their subsidiary, ebbu, Inc.
PotNetwork Holdings, Inc.
PotNetwork Holdings, Inc. is a minnow compared to the others on this list, but the company aptly demonstrates the massive
potential of the emerging CBD market. Through its subsidiary, Diamond CBD, the company has been quietly building an impressive CBD
brand underneath everyone’s noses.
The small company has cultivated impressive growth, and by Q3 2018 had generated over $18.1 million in revenue, surpassing all
of its efforts in 2017. POTN has also targeted a number of lucrative (and overlooked) subsets of the CBD market, including CBD for
pets and CBD coffee. PotNetwork’s
varied product line highlights one of the key advantages of CBD. Clever brands can work with major producers in unrelated
industries to tap into an entirely new audience.
This novel approach to a rapidly growing market is likely why Harbinger Research penned a glowing report on the
company. Harbinger gave the company a target price between $0.192 to $0.337.
The firm believes that despite the risk of volatility, POTN’s share price does not accurately represent the true value of the
company, particularly considering the Farm Bill.
Tilray Inc.
Tilray Inc. represents another heavy hitter in the marijuana industry. The company was the first cannabis stock to conduct
its IPO on a US stock
exchange. Tilray’s deal
with Anheuser-Busch (NYSE: BUD) was less
attractive to investors than the Constellation-Canopy deal.
Despite a rocky start to 2019, the Farm Bill has given Tilray space to breathe. Tilray has inked a revenue sharing deal
with Authentic Brands Group to market and distribute CBD and cannabis products. The deal will see Tilray become the preferred
supplier of active CBD ingredients for products within ABG’s portfolio of brands.
The stock has also been buoyed by Privateer Holdings inc.’s announcement that it has no plans to sell TLRY
stock in the first half of 2019, providing a reasonably stable floor for investors.
Tilray generally holds an outperform rating amongst analysts and has a price target
of $127.50
The American CBD market is set to explode
These are just a handful of companies jockeying for space in what is about to become a fiercely competitive market. CBD
represents one of the most promising subsets of the cannabis sector, and it has been kicked into overdrive by the passing of the
Farm Bill.
The interest of non-cannabis brands, like Authentic Brands Group, in CBD is especially significant. Other agreements, such as
the one between Green Growth Brands Inc and Designer Shoe Warehouse, have the potential to bring CBD to a completely new
audience.
The Farm Bill, in tandem with the departure of former attorney general Jeff Sessions, also signifies that legalization in
general is gaining momentum in the United States. Especially important is the fact that Trump’s nominee, Bill Barr, has confirmed
that he will not continue Session’s war
against legal marijuana.
This likely explains the Canadian cannabis companies’ sudden interest in expanding their CBD portfolios. The Farm Bill offers
the perfect moment for companies like Canopy Growth to cement itself as a major brand across the United States, even if it is
unable to directly market its recreational marijuana products.
The first half of 2019 will be particularly interesting as it marks the entrance of big Canadian players into the American
market, as well as providing new opportunities for America’s home-grown CBD industry.
These smaller American operators, like PotNetwork Holdings, have a slight first mover advantage but will they be able to compete
with the resources of the Canadian giants?
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