Depending on your perspective, it’s either amusing or tragic to see market commentators struggle to explain the way cannabis stocks swing day to day. All too often, the story has to stretch to fit the facts.
This week, for example, Big Cannabis took a step back because either the Biden administration is too busy to pursue full national legalization or Canopy Growth Corp. (NASDAQ:CGC) paid $435 million to buy a small competitor.
Neither of these narratives is actively negative. At worst, no instant rollback of national regulations leaves the cannabis industry exactly where it is. It’s a neutral headline.
And as for CGC deciding to print more stock to buy rival Supreme Cannabis, I am actually thrilled. You know I have been fixated on consolidation as the key to long-term profitability in this fragmented industry.
Knocking out another independent cannabis supplier pushes $18 million a year in existing sales to CGC. That’s an extra 5% of revenue growth this year.
But the real thrill here is that Supreme doesn’t sell commodity plant product. Its cannabis strains are enhanced and carry premium pricing, which is what everyone in this space craves right now.
Furthermore, adding Supreme to the mix means CGC will hold onto roughly 6% of the Canadian cannabis market, leaving plenty of room for additional consolidation. Until we see that, there’s no clear winner among the cultivators yet.
Meanwhile, speculators will remain in control and these stocks will swing for no appreciable reason. That’s simply how volatile areas of the market behave.
After all, the cannabis stocks I track are up 65% so far this year. That’s a big swing to the upside that reflects the forces of consolidation knocking out weak hands and giving the survivors a better shot at making shareholders happy in the long run.
In that light, this week’s short-term pain is practically a rounding error. Don’t blame CGC for doing the right thing. And don’t look to the White House for a handout.
We have everything we need for long-haul satisfaction right here. I’ve got triple-digit-percentage cannabis fun in my IPO Edge portfolio and more on the way. This is an entry point, not the end of the world.
