A growing relative value trade may be emerging in the cannabis market and a September 12 report from Cowen and Company points to stellar industry profit potential. As the general public begins to understand nuance between the risks marijuana usage, making distinctions between hard drug addiction, the attitudes and politics are shifting to a consensus opinion that points to growth. But with industry growth comes winners and losers. Cannabis investing is a fast growing field with opportunities to reach new heights, but also for major establishment players peril could be ahead.Cowen, for its part, raises a topic that might be the consumer discretionary stock story of for the next decade as one major sin industry, big tobacco, will likely be pitted against big alcohol.

 

cowen-9-13-big-market-opportunity The Ultimate Sin Trade: Buy Big Tobacco & Cannabis, Sell Big Alcohol

Cannabis photo
Photo by cheifyc (Pixabay)

Cannabis market growth projected to be a wet dream

With growth projected to reach $50 billion by 2026, cannabis is set to become the nation’s next “budding” industry, to steal a term from Cowen report. The future for weed investing looks spell-binding.

“Assuming federal legalization, we believe the formal, non-therapeutic cannabis industry can grow at a 24% CAGR over the next 10 years,” the report titled “The Cannabis Compendium: Cross -Sector Views on a Budding Industry,” noted. There are medical negatives to cannabis use, much like smoking a cigarette or consuming alcohol. But unlike hard drugs, the societal perception correlated to cannabis health risks “has fallen notably,” the report said. “Cannabis is generally considered less risky than alcohol,” the report stated.

cowen-9-13-canabus-less-risky The Ultimate Sin Trade: Buy Big Tobacco & Cannabis, Sell Big Alcohol

There are medical negatives to cannabis use, much like smoking a cigarette or consuming alcohol. But unlike hard drugs, the societal perception correlated to cannabis health risks “has fallen notably,” the report said. “Cannabis is generally considered less risky than alcohol.”

Driving this trend are “notable changes in consumer behavior and sentiment, which in turn is driving votes.” More and more states are not only legalizing medical cannabis, but increasingly recreational use is being approved by voters.

The societal trend towards use is a documented to the point the Cohen analysts think cannabis stocks should be categorized as the Consumer Discretionary segment due to consistent customer demand. In fact, using Colorado as a benchmark, there is potential for regulated dispensaries to be more predominant than Starbucks in the near future, the report projects.

cowen-9-13-canabus-pot-use

Initially, the industry will benefit smaller, independent players, but ultimately big corporations will dominate

Initially, this market growth will be driven by entrepreneurs and the economic activity will benefit the growing middle class and working class in the impacted regions. Eventually, however, the industry will be gobbled up by the larger players, which is where Cohen sees investing opportunity.

This presents a new economic dynamic. The 106-page analysis shows points to where growth will occur and as well as revealing those establishment players that will benefit and what big names could be disrupted.

cowen-9-13-age-and-affluance

Trends toward cannabis have a gender and demographic bias

Societal trends for recreational cannabis use tends to be gender specific, with men primarily driving the trend. As cannabis use increases, consumption of alcohol, specifically beer, drops precipitously. This presents a clear and present danger for the likes of industry Goliath Anheuser-Busch InBev.  In fact, the powerful alcohol lobby has been among the most influential behind the scenes when it comes to helping defeat cannabis legalization. Recently, however, that has become a losing effort as voters across the country seek to liberalize. Separate analysis indicates the beverage companies may enter the market and compete against big tobacco, a topic that has been whispered among professional investors.

From an investor’s point of view, this points to a potential blockbuster relative value trade: Buy sin stocks in the big tobacco and cannabis sector sell sin stocks in the big alcohol sector.

The tobacco industry in the U.S. has delivered reliable and robust profit growth, driven by their sticky user base and strong pricing power. Given the relative affordability of cigarettes in the U.S., we believe that these companies’ core business models offer ample runway for growth. However, as has been the case with both MST and hopefully e-cigs, these companies are also keen to diversify to capture new growth opportunities.

Is this the ultimate sin trade or what?

cowen-9-13-canabus-pot-use-at-expense-of-booze

cowen-9-13-political

Photo by cheifyc (Pixabay)