Of all major Canadian cannabis players, Canopy Growth Corp. (TSX: WEED) has the strongest portfolio of recreational marijuana brands by far, but come legalization day, it won’t matter. In time, regulators may decide to become more flexible, but as an investor, this certainly isn’t something you should bank on.
In the early stages of marijuana’s legalization, there are going to be very strict guidelines that will prevent the use of brands or endorsements to promote a specific producer’s exclusive line of product.
Let’s not kid ourselves; branding matters.
Just look at the tobacco industry, where the top three brands, Marlboro, Newport, and Camel, account for over 60% of the U.S. market share as of the end of 2016. If the Canadian government were to ever become open to unique brands, there’s no question that Canopy would have taken the path of Phillip Morris International Inc. (NYSE: PM) with a huge chunk of its capital going towards turning Canopy’s brands into household names.
When it comes to the next Marlboro in the cannabis industry, Canopy was a front runner with Tweed and its Snoop Dogg-endorsed offerings; however, now that regulators are waving the finger on such initiatives, it’s looking like Canopy is going to have a very tough time keeping the title of Canada’s largest pot firm by market cap. Aurora Cannabis Inc. (TSX: ACB), Aphria Inc. (TSX:APH), and MedReleaf Corp. (TSX:LEAF) are breathing down Canopy’s neck, so I think cannabis investors would be wise to spread their bets instead of going all-in on one producer, which may not end up being a standout winner as the industry continues to evolve.
Do fundamentals really matter at these levels?
When it comes to fundamentals early on in the game, Aphria stands out as a producer that’ll really thrive in a “no branding” environment, where cannabis will simply be an agricultural commodity. Cannabis producers with the ability to scale up while maintaining a low cost per gram of marijuana will be the ones that’ll pull out on top.
Fundamentals do matter — more so now that the government of Canada is setting up an environment where marijuana is simply a commodity with a fixed price. Unfortunately, Canopy’s fundamentals are nothing to write home about, and as a result, investors should expect its shares will lag over medium term as its peers begin to catch up.
Over the extremely long term though, I believe Canopy will regain the title of Canada’s top pot stock once branding gets the green light from regulators. I wouldn’t base an investment decision on such a speculative event happening at these levels, however.
Stay hungry. Stay Foolish.
