Distribution is key in the cannabis space

*This is not financial advice. All content should be considered opinionated. We are not responsible for any of your gains and losses. I am neither a licensed or registered financial expert. Please see a financial advisor before making investment decisions. 

The cannabis industry has seen its ups and downs. 2018 to Q1 2019 was a time of mania for cannabis stocks, the amount of hype built into the space led many of the cannabis stocks to garner really high valuations despite the miniature amount of revenue they generated. It's interesting to see that these named continued to rally despite cannabis prices plunging. Since many of the cannabis stocks were solely focused on the production of the cannabis crop, these companies were directly affected by the swings of the commodity's price. 

Photo by Next Green Wave on Unsplash

Once cannabis mania ended, many cannabis stocks sold off in a big way with some cannabis companies even going bankrupt. The poster child of the cannabis bubble, Tilray Inc. (NASDAQ: TLRY), went from $300 a share to at one point being $2.43 a share (52-week low). Other names have sold off in similar fashion. 

With many cannabis stocks badly beaten, many are wondering how they should approach their analysis of cannabis stocks. After analyzing many of the cannabis players and people's opinions on various cannabis stocks, there is one thing many can agree on: distribution is a major factor for cannabis stocks. 

When looking at distribution, since the cannabis industry is at its infant stages, the businesses haven't developed relations that established companies like Altria and Constellation brands would have. That's why many of the cannabis players partnered with various large companies. 

Here's a list of some of the biggest partnerships in the cannabis space:

• Moors Coors Co. (NYSE: TAP) and Hexo Corp (NYSE: HEXO)
• Tilray Inc. (NASDAQ: TLRY) and Novartis AG (NYSE: NVS)
• Canopy Growth Corp (NYSE: CGC) and Constellation Brands Inc. (NYSE: STZ)
• Cronos Group Inc. (NASDAQ: CRON) and Altria Group Inc. (NYSE: MO)

With these partnerships, the cannabis companies will have help making relations with big distributors like Walmart, 7-Eleven, etc. Many of the companies that invested in these cannabis companies like Altria and Constellation Brands paid huge premiums to take stakes in those companies. To make up for the huge premiums they paid, those companies will have to provide the tools and resources to help their investment thrive and make their investors money. 

If you think about it, Altria Group has access to many stores since they sell cigarettes in many places. Since they have a stake in Cronos Group, Altria can give Cronos access to thousands of stores and help them boost sales. The same thing can apply for Moors Coors and Hexo Corp and Constellation Brands and Canopy Growth. These partnerships are very powerful for those cannabis firms. 

Photo by Wesley Gibbs on Unsplash

While most of the cannabis players seem to have its focus aligned with the retail space, Tilray seems heavily focused on the medical cannabis space. With its partnership with Novartis, a large pharmaceutical company, Tilray is able to work directly with Novartis on the development of medical products and services that utilize cannabis. Novartis has its own network of distribution of drugs and other products. Tilray's access to Novartis's network helps Tilray gain a presence in the healthcare industry, allowing it to capitalize on the healthcare space faster than its competitors. 

Distribution is a big part of the cannabis industry and is what will help create immense growth in the sector. The only issue is that many of the cannabis names don't make money. If its the case that they sell their products at a loss to produce revenue, then this practice is unsustainable and it would be a matter of time before that company goes bust. By diverting attention away from producing the commodity and focusing more on creating products and services that aren't affected directly by the commodity price, then these cannabis companies can start generating stable revenues and even profits. 

Also, there are other implications with the cannabis industry. Banking laws, legalization, accounting rules, etc. are all things that make investing in the cannabis space hard. Each country has its own laws and regulations and legal matters get more complicated when analyzing the rules from each geographic location. 

If you're looking at the cannabis space from a long-term perspective, the distribution and the company's financial health are two things that an investor would need to pay attention to. The legal stuff matters less since at the end of the day, most of America supports the legalization of cannabis. 

The cannabis sector is very volatile and many of the cannabis players do have a high chance of diluting their shareholders in order to facilitate their weak balance sheets. The sector is speculative but does have a bright future. Invest wisely.