Momentum-oriented investors are attracted to high-flying industries. In the mid- to late-1990s it was technology and the Dot.Com mania. In the early- to mid-2000s it was housing and energy-related companies. And from mid-2011 until mid-2015 momentum investors shifted their investing dollars to biotech.
Growth-oriented investors aren’t as concerned with valuations as they are with sales growth. And in today’s market, investors looking for the next area of explosive growth are right to be focused on the cannabis industry.
But for US-based investors, cannabis companies present a unique challenge.
Cannabis is still listed as a Schedule 1 drug under the Controlled Substances Act, and that means most US-based institutions have relatively few ways to invest in the cannabis space.
Currently, investors unwilling to dabble in the under-regulated over-the-counter bulletin board market are limited to investing in companies like Canopy Growth Corp (NYSE:CGC), Tilray Inc (NASDAQ:TLRY) and Cronos Group Inc (NASDAQ:CRON).
But these three names have become overrun with speculative money likely to jump ship at the first sign of trouble.
US investors need to face a basic fact: Demand for legitimate cannabis investment exposure is swamping the available supply.
Now, because an increasing number of investors want exposure to the cannabis space via the major stock exchanges (Nasdaq and NYSE), investors can either chase the red-hot price momentum in a stock like Tilray, which has risen nearly 300% in the last month, or they can dig deep and find the under-the-radar companies just beginning to get involved in cannabis.
I, for one, prefer to do some digging.
Transforming Tobacco into Cannabis
Morrisville, North Carolina-based Alliance One International (NYSE: AOI) is a $226 million company that’s traditionally been known as a small player in the tobacco packaging and growing industry. But earlier this year Alliance One’s management announced a bold initiative aimed at both changing the public’s perception of the company and clearing a path for the company to grow and expand into non-leaf growing areas of its industry.
On February 8, 2018, Alliance One International’s president and chief executive, Pieter Sikkel, sent a letter to shareholders announcing a series of developments aimed at driving the company’s growth over the next two to three years.
In Sikkel’s letter, he highlighted the fact that AOI is no longer a pure tobacco grower or packaging company. And to underscore the fact that AOI is and will continue to become more than a run-of-the-mill tobacco company, the board announced the One Tomorrow transformation campaign.
When AOI announced the One Tomorrow campaign in early February, management made sure to provide enough color to keep investors from thinking they were merely trying to gloss over legacy issues and stabilize the declining stock price.
After Sikkel told investors that he believes the One Tomorrow campaign will “drive future growth opportunities and reshape our brand as the trusted provider of responsibly produce, independently verified, sustainable, and traceable agricultural products and services,” he went on to lay out what the company believes are compelling market opportunities.
Here’s what Sikkel told investors back on February 8:
“Most of our new business lines focus on products that are value-added or require some degree of processing. These products generally have higher margin potential than our core business and play well to our strengths. In January, we successfully acquired majority stakes in two new joint ventures. The extension into growth segments, namely e-liquids, industrial hemp, and cannabis, expands Alliance One’s presence in higher margin, fast-growing categories.”
A Foray into Cannabis
Shortly before announcing the One Tomorrow campaign, in January 2018, the company’s wholly owned indirect subsidiary, Canadian Cultivated Products, acquired a 75% equity position in Canada’s Island Garden Inc. (CIG) and an 80% stake in Goldleaf Pharm Inc. (Goldleaf).
In May 2018, Canadian Cultivated Products was rebranded to FIGR Cannabis, Canada’s Island Garden was rebranded to FIGR East, and Goldleaf Pharm was changed to FIGR Norfolk. FIGR products are expected to become available in Canada on October 17 when the recreational adult market is fully legalized, though medical patients can already purchase cannabis under current Canada’s Island Garden brand.
Alliance One Rebranded
In the company’s most recent earnings conference call, Pieter Sikkel said this to investors:
“The measured investments we are making in our industrial hemp, e-liquids and legal Canadian cannabis business lines will allow us to build out our capabilities to position us for further success in evolving regulatory and consumer environments. We believe our new businesses afford us more than just growth opportunities. As we build upon our agronomy expertise and traceability capabilities, we can create different and better consumer products as well as offering value-added services and processes that research shows, both business customers and consumers are seeking.”
But new investments aren’t the only focus. To drive home how crucial it is that investors recognized the company’s commitment to One Tomorrow and its new growth initiatives, Alliance One International has changed its name and rebranded itself as Pyxus International (NYSE: PYX).
A Long-Term Breakout
Alliance One (now Pyxus International) broke out of a long-term downtrend in February 2018 when the company announced its One Tomorrow Campaign and began discussing its move into legal cannabis.
The cannabis announcement was good for more than 120%, as AOI’s stock rocketed to $30 from $13 between early February and mid-March. But like most cannabis stocks, the shares came under pressure and drifted from near $30 to below $14 by late July.
Investors rediscovered AOI/PYX and its foray into the Canadian cannabis industry on September 11, when the company’s wholly owned indirect subsidiary, FIGR Inc., announced expansion plans related to Goldenleaf Pharm.
FIGR's announced expansion plans drove the stock 36% higher, and, once again, became a focal point for US-based cannabis investors.
The bottom line is US investors are limited in their choices for cannabis investments. But with AOI/PYX being listed on the NYSE and relatively known among cannabis investors, this is a fantastic stock for cannabis traders to follow.
Shares of Pyxus were down just under 2% to US$12.12 in Friday morning trading in New York.
At the time of publication, Bob Byrne had no positions in the stocks mentioned.