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In 2018, cannabis investors were ecstatic as most pot stocks skyrocketed by more than 500%. The story shifted in 2019, as the early-stage market experienced its first pullback.
With valuations depressed, 2020 could experience another bull market surge. By betting on marijuana using your TFSA, your gains will be completely protected.
But which stocks are best positioned? Even in an upward market, certain stocks outperform others.
The number one rule to keep in mind is to avoid commoditization. While cannabis is a bit different from pure commodities like corn and soy, it’s still a crop that can be mass produced by any grower with enough upfront capital.
Over the long term, prices will trend lower and lower as industry supply ramps. Weak pricing and surging supply was a big reason for the downturn in 2019.
How do you avoid commoditization? Simple: you differentiate your products through branding. Coca-Cola Co is a prime example. Coke is made up of 100% commoditized ingredients. It costs the company pennies to produce a bottle, yet it sells for more than $1. What’s going on?
Coke has done what few consumer brands ever achieve: build a brand with intense customer loyalty and trust. To succeed long term, cannabis companies need to figure out how to replicate this success in their market.
When it comes to branding, one Canadian pot stock has a big lead. That’s because branding is the number one feature of its operating strategy.
If you can’t beat them, join them
Most cannabis stocks are investing millions of dollars to create their own brands from scratch. This strategy remains untested, and we’re still not sure whether consumers will flock to them. But you can ask yourself a simple question. What is more likely to succeed: a cannabis drink from Coke, or a cannabis drink from an unknown start-up?
Hexo Corp (TSX:HEXO)(NYSE:HEXO) is betting on the latter. That’s why it’s ditching independence altogether and instead partnering with existing brands that consumers already know and love. It needs to split the profits with the partner, but that’s a small price to pay for instant credibility and recognition.
In 2018, it forged a partnership with Molson Coors Canada Inc. (TSX:TPX.B) to co-create cannabis beverages. Do Canadians already know and love Molson? You bet.
This month, the joint venture is expected to release its first products, proving that Hexo can execute once a partnership is formed, which should help it secure more partnership in 2020. Hexo management has pinpointed other consumer segments like sleep aids, cosmetics, and edibles as potential opportunities.
As the only cannabis platform company with infrastructure specifically built for external partners, Hexo can capitalize on every pot opportunity that emerges over the next decade.
The model is still being validated, but that’s why shares trade at such a measly valuation. In 2020 and beyond, as its partnerships gain traction, this stock could have more upside than its multi-billion dollar peers.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.
The Motley Fool recommends HEXO. and HEXO.
Fool contributor Ryan Vanzo has no position in any stocks mentioned.