The Biggest Investment Opportunity of Your Lifetime, Part II

The biggest investment opportunity of your lifetime, part II... Four key traits of the cannabis elite... This factor is great for profits today – and critical for survival tomorrow... The 'No. 1 hurdle' for new cannabis firms... Why branding will be crucial...

Yesterday, I (Thomas Carroll) explained why now is an ideal time to invest in legal cannabis...

It could be one of the biggest investment opportunities of your lifetime.

In short, right now, we have the rare chance to get in near the "ground floor" of a brand-new industry that could soon become one of the biggest in America.

It could easily grow by 10 times or more over the next several years, making many investors incredibly wealthy as it does.

Of course, not every investor is sure to do so well...

If you hope to make a fortune in this new market, you must be able to identify the best companies from amongst the dozens of likely false-starts, pretenders, and also-rans.

Our research has identified a handful of simple traits that can help us do so.

Yesterday, I shared the first and possibly most important of these ideas: The most successful companies tend to be innovators. Today, I'll cover a few more...

In our discussions with industry experts and insiders, another idea came up again and again...

The importance of being the "low-cost provider."

You see, growing and harvesting legal cannabis is extremely lucrative right now. In Canada, which legalized recreational use last June, an eighth of an ounce of marijuana costs $27.90, according to a 2018 Forbes article. It's about $40 for the same amount in the U.S.

Meanwhile... Canadian producers only spend an average of about $5 to produce that much cannabis. So it's no wonder a lot of new companies are rushing into this emerging industry.

But the good times won't last forever...

Resource markets swing from times when supplies are scarce and prices are high... to periods when supplies are too great and prices collapse. That's just the nature of commodities... whether it's oil, wheat, or legal cannabis.

At some point, growers will flood the market with pot. And when supply levels rise, prices will fall. This could be three or four years from now... But whenever it happens, it will pressure many of the companies that rushed into the cannabis market.

This is a key risk for the industry.

That's when it will be critical to keep an eye on costs...

The low-cost providers will have the most staying power. They will maintain the best margins, earnings, and stock performance.

Operating a vertically integrated cannabis operation requires several key steps:

• Growing the cannabis plant
• Harvesting
• Extracting key compounds, such as THC and CBD
• Processing the compounds into value-added products, like oils
• Branding the product to create a loyal customer following
• Distributing to a network of retail stores or pharmacies

The best vertically integrated companies are working to hold down costs at each of these steps.

Alternatively, some stand-alone companies serve only parts of the supply chain. These companies excel in one thing or another... And that may make them great partners.

For example, you can find companies that supply all the glass and plasticware needed during the production process. Other companies do nothing but consult on branding.

We have spoken to many of these companies...

Both the vertically integrated and the "single-expertise" companies.

They all want to minimize operating costs...

For example, many growers are looking around the globe for the cheapest places where they can farm cannabis. Colombia in South America currently offers one of the lowest-cost locations.

A number of better-known Canadian cannabis companies – Aurora Cannabis (ACB), Aphria (APHA), and Canopy Growth (CGC) – have already acquired grow facilities in the country. This reduces the overall cost per gram of cannabis flower to less than $0.50. Cultivators in Canada average about $1.40 per gram.

That's an incredible difference... Costs for growers in Colombia could double and still be a fraction of what Canadian growers pay.

That's great for profits today... And it will be critical for survival when the market for marijuana inevitably turns.

A strong regulatory understanding also separates the most successful companies from others...

It takes more than a grow lamp and some easy-going neighbors to succeed in the new, legal marijuana market...

As I mentioned yesterday, the basics of cultivating, harvesting, and distributing the cannabis flower are not complicated. It's essentially good old-fashioned farming.

But to be successful in this market, companies must also be able to navigate a challenging regulatory environment.

This is easier said than done. The rules are changing by the minute. And it's likely to become even more difficult in the future.

That's because the cannabis industry is now gaining legitimacy via strong and consistent evidence of its medicinal properties.

As popular as marijuana may become as a recreational product, health care is what's really driving much of the legalization movement and creating the huge investment opportunities in front of us right now.

And as you probably know, health care is a massively regulated industry...

It has to be. You – the consumer – entrust doctors, hospitals, health insurance companies, and imaging centers with your most important asset: your health.

Daily decisions across the world make the difference between life or death.

In this environment, adding something as controversial as cannabis will only increase the regulatory scrutiny. Remember, it remains illegal at the federal level in the U.S.

In our discussions with cannabis companies, we found that the best ones are going to great lengths to understand the regulations of the country or U.S. state where they're operating.

Being conservative is key...

The Canadian companies we like are treading lightly when it comes to the U.S. Most are keeping their distance until the federal rules are better sorted out.

One large beverage company underscored this with us. Its managers said gaining 100% regulatory clarity is the company's No. 1 hurdle to entering a new market. Without it, financial and potentially criminal risks can become real.

For example, one hemp grower recently had its 7,000-pound shipment confiscated in Idaho, while it was in transport to be processed. In Idaho, a substance containing any THC is illegal. Hemp is a cannabis plant that contains less than 0.3% THC. It's widely used in beauty, health and wellness, and industrial products.

The federal government made hemp cultivation legal nationwide last year, but Idaho continues to have more stringent regulations. Not knowing this – or choosing to take the risk – likely cost this company a large crop and potentially further legal action.

So what specific signs do we look for here?

Among those we like to see are medical and health care professionals on a company's executive team. Folks who are veterans at cutting red tape have no illusions about how tricky and time-consuming it is to navigate a regulation-heavy industry.

It's also encouraging to see former government officials and health care regulators on board. We love it when a company is working with the folks who wrote the rules and know the people enforcing them. Few things are better at helping win approvals and steering clear of trouble.

As I said, adding a product as controversial as cannabis to the already regulation-heavy health care sector can easily trip up a company whose leaders are naïve about the challenge.

A commitment to understanding the nuances of all the layers of bureaucracy and legal restrictions is critical to success. It's every bit as important as a commitment to controlling costs and innovation.

Finally, we've found a focus on branding is also important...

From the smallest private company to the largest billion-dollar organization, we've found many of the most successful companies have an interest in strong brand identity.

This doesn't happen overnight. Desire to have a well-respected brand starts at the beginning. Every step along the way must elevate the product further so that customers trust the brand they are buying and know exactly what they will get.

Companies that have a strong focus on branding likely also have a strong belief that the plant itself is not the ultimate driver of value.

This is exactly in line with our thinking as well...

As I mentioned yesterday, the ultimate drivers of value are the "cannabinoids" – the compounds in the plant that provide the desired effect via different modalities (vapes, joints, gummies, etc.).

If a company can consistently deliver the same product with the same qualities – and match that to a brand – it will create loyal customers that seek out its products in a virtual sea of competition.

For example, a beer drinker who loves Miller Lite will seek it out everywhere. This is because Miller Lite is predictably produced and distributed worldwide. Consumers know exactly what it means to enjoy a Miller Lite beer.

We also believe we'll see higher-end and lower-end brands of cannabis. To use another example from the alcohol industry, some customers will want the Woodford Reserve of vape pens and oils. Others will be satisfied with the Jim Beam version.

Branding will define the two ends of this spectrum, and everywhere in between.

We're just getting started with our approach to cannabis investing...

But I hope you've learned a lot about the basics over the past couple of days.

If you'd like to learn more, I urge you to join me tonight for Stansberry Research's first-ever Cannabis Investing Event. We'll dive deeper into why this burgeoning industry offers massive upside today... And we'll help you learn how to capture as much of it as possible.

Again, this event is absolutely FREE to attend, and there are no obligations. You'll even get the name and ticker symbol of one of my favorite cannabis stocks just for showing up.

It all begins promptly at 8 p.m. Eastern time. I hope to see you there. Click here to join us.

New 52-week highs (as of 3/26/19): Automatic Data Processing (ADP), Essex Property Trust (ESS), General Mills (GIS), Barrick Gold (GOLD), Hershey (HSY), iShares iBoxx Investment Grade Corporate Bond Fund (LQD), Nuveen Municipal Value Fund (NUV), Procter & Gamble (PG), Sandstorm Gold (SAND), Starbucks (SBUX), Vanguard Real Estate Fund (VNQ), and Wheaton Precious Metals (WPM).

At least one longtime subscriber is excited about tonight's event. Will you be joining us? If so, be sure to let us know your thoughts at feedback@stansberryresearch.com.

"I am really looking forward to Thomas Carroll's insight into this fast growing business. I have speculated on a few cannabis stocks and done extremely well. Now that the market is beginning to flush out some, it will be good to have an educated guide." – Paid-up subscriber Kirk H.

Regards,

Thomas Carroll
Baltimore, Maryland
March 27, 2019