Steve Jobs once said, "A lot of times, people don't know what they want until you show it to them." This certainly applies to edible (and drinkable) marijuana products.
Although the classic infused edible brownies and cookies have been around forever, you had to make them yourself. The option to go into a dispensary and purchase not only brownies, but everything from gummy bears, to infused ciders and gourmet chocolates wasn't available until recently. Therefore, consumers didn't know they wanted it.
According to Colorado-based Cannabis data firm, BDS Analytics, February 2017 sales of marijuana edibles in Colorado gained 67% over the previous year. Now that consumers have been "shown" edibles, it's clear that they want them in a big way.
Edibles Background & Investment Thesis
Compared to other marijuana consumption methods, edibles are quite a bit more complicated. For starters, all edibles start with some sort of cannabis oil or concentrate. You can't just put dried marijuana into a food product and expect to experience an effect from it - THC must be heated for it to change into its psychoactive form. The process of making marijuana oils is beyond the scope of this article. All prospective investors need to know is that it's not a simple task (benefiting companies that have the know-how to do it well).
Additionally, cannabis oils are often made with trim- or what's left over after the flowers have been cleaned and sold, further increasing the margin potential of this space. The margin potential increases even more, when the oil is turned into food and drink products that sell at an even greater markup.
That's not all. Strategic branding, marketing and licensing agreements make the infused edibles space even more interesting from an investment point of view. In the U.S. you can't move marijuana products across state lines, but you can 'move' intellectual property, making it that much more important. Many of the edibles companies license brands or methods of manufacturing, allowing them to profit across state lines.
Cannabis Edibles Companies
Although many publicly traded cannabis companies have some degree of exposure to the coming growth in edibles, we believe the following companies have the best potential to capitalize on this trend because of their expertise in oil extraction (a prerequisite to edibles manufacturing) and their portfolios of cannabis infused edible brands and intellectual property.
CannaRoyalty Corp. (OTCQX:CNNRF): Although CannaRoyalty Corp. is a diversified cannabis company, their investments in and around the infused edibles space are worthy of mention. CannaRoyalty holds a 100% equity interest in Soul Sugar Kitchens, a California-based gourmet edibles manufacturer and developer. CannaRoyalty also has an exclusive licensing agreement with micro-dose edibles manufacturer Stokes Confections in Washington, Oregon and Canada.
Golden Leaf Holdings (OTCQB:GLDFF): Golden Leaf Holdings' branded products are available in over 250 Oregon dispensaries and 144 Washington dispensaries. Golden Leaf Holdings focuses on extracts, which, as mentioned previously, is a necessary prerequisite to the production of any edibles. Golden Leaf Holdings' recently entered into an LOA to acquire Chalise Farms, an Oregon based vertically integrated cannabis business. Chalise Farms' products include gourmet edibles.
Lexaria Bioscience (OTCQX:LXRP): Lexaria Bioscience is developing methods of increasing the bioavailability of cannabinoids when they are consumed orally. Ingestion results in the slowest time between when cannabinoids are consumed and when their effects are experienced, typically taking between one and two hours. Lexaria's patented process reduces this time to 15-20 minutes and increases the bio-absorption to equal the absorption resulting from inhalation. The company generates revenue from this technology in two ways, royalty agreements and product sales. Lexaria currently has royalty agreements with companies producing both THC and CBD product lines in three countries and eight U.S. states. The company also distributes CBD infused teas, energy bars and capsules that utilize their technology.
Nutritional High International (OTCQB:SPLIF): Nutritional High focuses on the edibles and oil extracts market in the United States. In collaboration with their Colorado partner Palo Verde, they have the necessary licenses and facility to extract oils and produce infused edibles. Their facility is currently operational, though they are undergoing upgrades to increase production capacity through automation. These upgrades are expected to be completed in the second half of 2017. In the state of Illinois, Nutritional High is one of 52 applicants that received a medical marijuana dispensary license and is in a joint venture to fund the roll-out of the dispensary and develop an edibles manufacturing and distribution facility.
Even if you are a diehard cannabis consumer, it's tough to deny that edibles are an area of growth and opportunity for any cannabis company that is willing and able to take advantage of it.
In terms of investing, we think owning a basket of these names is a smart move, not only in terms of diversification, but also in terms of gaining exposure to the various sides of the edibles market, different locations, medical versus adult-use etc.
For more information on any of the companies mentioned, be sure to check out our marijuana investment database.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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