Like Bitcoin and cryptocurrencies, the budding cannabis industry used to be the talk of the town. But now that shares of most cannabis stocks have imploded on themselves, and most momentum-chasing speculators have moved on to “hotter” opportunities, there’s finally a chance for us value-conscious investors to capitalize off an industry that’s still capable of tremendous long-term growth.
There are still compelling opportunities within the out-of-favour cannabis industry now that investor expectations have been drastically reset and valuations are depressed. For those willing to go against the grain and look among the wreckage, the potential rewards could be astronomical, not just with maturing cannabis producers, but with other overlooked cannabis retailers that could allow for greater potential rewards without the massive amounts of volatility that the industry has been plagued with over the years.
There’s no question that expectations got out of hand with marijuana stocks.
I was bullish on cannabis stocks in the years before legalization. Still, I urged investors to sell out of anything within the frothy industry, as the post-legalization environment was likely to face muted demand for legalized cannabis thanks to the proliferation of the black market. My thesis was simple. Marijuana was a commodity, and the commodity was likely to depreciate in price in the legalized environment, as legal and grey-market supply looked to surge.
The post-legalization environment has been too unkind to pot stocks
Fast forward to today, and shares of the hottest pot stocks of yesteryear are no longer newsworthy. Heck, you probably haven’t heard of the industry amid this coronavirus crisis, even with the bounce in demand, as consumers looked to stock up on supply to smoke up during quarantines and government-mandated shutdowns.
While few things are likely to move the needle for the heavily out-of-favour producers (some of which may be looking to merge) as back in marijuana’s glory days, I think there are opportunities in the space for long-term investors who seek to capitalize off the industry’s growth into maturity.
While I still think the price of legal cannabis will continue on the downtrend, as licensed producers look to better compete with the black market, I view compelling risk-adjusted growth prospects in the cannabis retail scene.
You’ve probably heard of Cannabis 2.0, a supposed tailwind that failed to propel cannabis stocks in the post-legalization environment. Edibles, vapeables, and all the sort may not be able to stop continued pressure on cannabis prices. However, I view the rise of such innovative, higher-margin products as a boon for retailers like Fire & Flower (TSX:FAF).
Fire & Flower is going all-in with the experiential factor. Its stores are cleanly laid out, with compelling viewing areas to display various products. The latest vapes are on display, with customer service staff available to help shoppers that haven’t been keeping up with the latest in Cannabis 2.0 products.
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An underlooked growth prospect
You’ve probably noticed many cannabis retailers capitalizing on the experiential factor are popping up in your neighbourhood and that the scene is becoming quite crowded. What separates Fire & Flower from the pack is its partnership with convenience store kingpin Alimentation Couche-Tard, which owns a partial stake with the option to take a majority (50.1%) stake at some point down the road.
Fire & Flower is venturing alongside its deep-pocketed friend Couche-Tard with a pilot project in Alberta that will see select Circle K locations be accompanied by an adjacent Fire & Flower location. I think the pilot project will be a huge success that could see Fire & Flower capitalize off the high traffic that will be flowing through Couche-Tard’s convenience stores.
When it comes to cannabis retailers, it’s not only about the experiential factor; it’s about convenience. The pilot project, I believe, will serve as a launchpad that could send Fire & Flower surging. Moreover, if the pilot is a runaway success, I see Couche-Tard exercising its right to up its stake in the cannabis retailer, which could become a force to be reckoned with over the next few years.
With FAF stock trading at 2.1 times sales, I think the stock is nothing short of a bargain, with Couche-Tard standing in its corner.
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.
Fool contributor Joey Frenette owns shares of ALIMENTATION COUCHE-TARD INC. The Motley Fool recommends ALIMENTATION COUCHE-TARD INC.