Big Tobacco is Making Moves in the Cannabis Industry
In the 1980s, Oldsmobile produced the best-selling cars in America. In 2004, the last Oldsmobile rolled off the assembly line and the brand was discontinued. The history of US businesses is filled with similar stories. Does anyone remember Compaq computers?
Here’s another name to throw in the hat. RJ Reynolds. Don’t bother looking for them as an investment. They were bought by British American Tobacco (BAT) in 2017, the same company that just invested $177 million into Organigram (OGI).
Big Tobacco is evolving into Big Cannabis. Oldsmobile got absorbed by GM. Their assembly lines didn’t get dismantled. Hewlett Packard used Compaq technology to build the Presario. RJ Reynolds doesn’t make cigarettes anymore. They’re smoking something else over there now.
The Marlboro Man would be Vaping in 2021
It’s hard for this generation to imagine billboards of Tom Selleck with a Marlboro in hand or restaurants filled with clouds of smoke, but that was the world some of us grew up in. Modern society doesn’t allow such things. Tom would be vaping at an outdoor table.
Altria Group, Inc. (MO) makes Marlboros now. They also make Parliaments. Cigarette sales, which were at $628 billion in 1980, are down to $216 billion. Altria invested $1.8 billion into recreational cannabis in 2019. Are you starting to see the pattern?
In February 2020, Altria filed two vaporizer patent applications with the US Patent and Trademark Office. Both devices are specifically for cannabis use. The company also bought two older vaporizer patents that were owned by the same inventor.
Swedish Match Adds Nicotine to CBD Pouches
Cigarette sales skyrocketed in the 60s and 70s because the product is highly addictive, and billions were spent on print and television marketing. The marketing campaigns aren’t allowed anymore, but the addictive component, aka nicotine, is still legal.
Swedish Match (STO), one of the “Big Three” for cigarette sales in the United States, launched a new product in 2020 called G.4. Green Flow. It’s a CBD pouch with 8mg of CBD and 8 mg of nicotine. They have found a way to make cannabis addictive. Think about that for a moment.
The tobacco industry knows better than most that addictive products can produce billions in annual revenue. As cigarette smoking declines and cannabis regulation is removed in the United States, what do you think happens next? History could very well repeat itself.
Investing in Cannabis through Big Tobacco
Organigram (OGI) stock is up 10% since the BAT announcement. I already own it, but I’m doubling down because I think the price will move higher this year. BAT (BAT) is up 1.80% this month. I bought them on March 1st and plan on holding long term. I like this partnership.
Altria (MO) is hard to predict. Their earnings were up 4.2% for 2020 and their stock price saw a 14% gain this month already, but I’m just not buying it. They are the smallest of the tobacco big three with just $25 million in annual revenue and I feel like they’re about to get eaten.
It’s not just a hunch. Altria is heavily invested in Cronos Group (CRON), a cannabis company that looked promising a year ago when it spiked at $21.92 a share. They opened at $10.34 this morning and there’s no positive signs that they’ll uptrend this year.
As for Swedish Match (STO), I can see the financial potential, but can’t in good conscience throw any money their way. I feel like they’re spiking candy bars with LSD. There are too many health benefits to CBD to taint it with nicotine, so I’m a hard no on STO.
Imperial Brands and the Cannabis Dried-Flower Market
The fourth largest tobacco company in the world, Imperial Brands (IMB) out of the UK, is the one I’m watching most closely this year. They’re down 7.9% this year, but they have a $100 million invested in Auxly Cannabis Group (XLY), which is up 40.74% YTD.
On February 8th, 2021, Auxly completed a bought-deal public offering for $20 million, ensuring they’ll have the cash to make a big move. Ten days later, they announced an expansion plan to increase market share of the lucrative Canadian cannabis dried-flower market.
There’s a hidden gem in here. While wading through press releases and earnings reports for Auxly, I found a penny stock I really like. Their distribution partner for the new expansion is a company called Inner Spirit Holdings Ltd (INSHF). It’s up 89.27% YTD. Buy it.
Auxly also has a footprint in the medical cannabis space, which is looking like a promising market in the months and years to come. I’m buying the trifecta here (IMB, XLY, and INSHF). If Auxly succeeds in their expansion, it should turn a profit on all three for me.
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