9 for ‘19
Guest post by Adrian Sedlin, CEO of Canndescent
As we enter 2019, it’s time to share my annual predictions for what the New Year has in store for the cannabis industry and related sectors. Prognosticating the future is hazardous, so please don’t use my crystal ball, or lack thereof, as an investment thesis.
#9: 9 more legalize
Entering 2019 a total of 41 countries around the planet have either decriminalized or legalized adult use and/or medical cannabis including Spain, Thailand, Australia, Canada, Mexico, Italy and more. The industry and plant have momentum globally, and the velocity will only increase in 2019. At least 9 more countries will legalize or decriminalize cannabis in 2019 bringing the total to 50 or more. The bulk of the action will come in the EU and South America.
#8: RTO, Don’t Think So
In 4Q18, it seemed that anyone who could say “cannabis” and had a hot-dog cart planned to RTO on one of the Canadian exchanges. The success of companies like Canopy Growth, MedMen, and Tilray swept in a slew of U.S. MSOs rto-ing. Now, most of the Q3 and Q4 RTOs find themselves 30%-40% below their IPO prices, and investors have discovered huge lumps of coal in their stockings just before bonus season. Heading into the New Year, investors will remember, “Fools rush in where angels fear to tread,” and, once again, replace hype with fundamental analysis. In 2019, expect fewer RTOs and for those already listed, they may be caught between a hedge fund and a hard place.
#7 Beer Gets Flatter in North America
In 2018, the adult use cannabis market tripled in population size with markets like Massachusetts, California, and Canada coming online. Heading into 2019, 80 million more North Americans reside in markets where cannabis is legal and easily accessible to adults. This consequential change creates material headwinds for the beer industry which, like cannabis, indexes about 2:1 men-to-women. Expect flat to declining unit volumes in the Big Beer and consider that a short position on beer may be less volatile than a long position on cannabis stocks.
#6 Hurray for the DEA
Since the Controlled Substances Act (CSA) passed in 1970, the University of Mississippi has been the only institution or company allowed to cultivate cannabis for medical research purposes in the USA. It’s been 48 years, and the U.S. has only a single approved cultivator. This has glaringly hindered research because the monopolistic provider, U. Miss, lacks competition or the need to innovate. In 2019, this will change. Expect the DOJ/DEA to approve at least 2 new institutions or companies to cultivate cannabis for medical research purposes. Applications have been meandering through the approval process since 2016, Jeff Sessions is out, and there’s enough pressure on the DOJ from Congress for something to finally happen. The Ole’ Miss Rebels won’t be alone this time next year.
#5 Trump Stumps
With the Senator from Massachusetts, Elizabeth Warren, announcing her bid for the 2020 Presidency, expect almost all Democratic candidates to promote pro-cannabis positions in their platforms. Recognizing the polling data in all the major swing states and the general public, President Trump will tack slightly left of center and reiterate a message of medical cannabis legalization while also advocating in favor of The States Act. Like him or leave him, Trump has shrewd political instincts and will co-opt the issue into his talking points before The Democrats can make hay with it.
#4 Bad High
While it pains me to say this, I don’t expect the large, public cannabis stocks to experience much price appreciation in 2019. Historically, their valuations can be described as, “outrageously outrageous”, and now, that a bit of the bloom is off the bud, companies will need to deliver on the aggressive forecasts. Unfortunately, they won’t, and this will cause a sector pullback. While we can all have exponential dreams, we live in the real world where things take twice as long and cost three times as much. Cannabis will most certainly blossom into a trillion-dollar sector over the next 25 years, however, stocks are still ahead of themselves, and this will cause further pullback. As a corollary to this, expect to see some questionable M&A as public companies miss forecasts and try to show growth in other ways.
#3 My Bad
Continuing on the stock pullback front, expect two to three high profile sackings of public cannabis CEOs. Serving the sizzle without the steak, some people will be sharpening their resumes by end of 2019.
#2 Gold in The Golden State
Many critics argue that California made a mess of things in its first year regulating adult use cannabis. 2019 will prove far more prosperous for license holders as operating a cannabis business without a license will finally become a felony in January 2019. Wielding the threat of a felony conviction, the state has an important deterrent to shut down the illicit market and has taken away all the excuses of people claiming to need more time to get compliant. Moreover, in 2019, statewide delivery opens cities and counties with retail bans and brings significant demand back to the legal market. Last, cannabis friendly, Gavin Newsome steps into the Governor’s Office, so expect the ride in California cannabis to head up and to the right.
#1 Legal States Strike Oil
Since man first discovered the cannabis plant, flower has reigned as king. We smoke it, roll it, vape it, pipe it, and bong it. In 3Q19 and 4Q19, expect to see oil and concentrates running neck-in-neck with flower, challenging it for the leading position in adult use markets with greater than 18 months operating history. By way of example, California closed 2018 with 39% share for flower and 26% share for concentrates. Expect the back half of 2019 to look more like 33% flower and 31% for oils and concentrates.
About the author
A lifelong entrepreneur, Adrian Sedlin builds brands and cash flow businesses from $0-$150MM in sales. Over his 25 year career, Mr. Sedlin has raised over $100MM in capital, created 5 successful exits, and thrived in diverse industries including B2B ecommerce, B2G SaaS, direct response, and consumer packaged goods.
Co-founding his first company at age 21, Mr. Sedlin served as its CEO and sold the business to Student Advantage (NASDAQ; STAD). Following this early career success, Mr. Sedlin served as a C-Suite executive in companies such as Credit2B (EVP; sold to S&P in 2001), Bargain Network (COO; Sold to Vertrue in 2004) and CrimeReports (Acting CEO; sold to Motorola in 2014). In addition, Mr. Sedlin served as CEO of Ocenture from 2006-2010, growing sales over 20x, achieving 25% EBITDA margins, and earning Inc. 500 honors for three consecutive years.
In 2015, Mr. Sedlin left early retirement to launch CANNDESCENT, a California cultivator of ultra-premium cannabis, and the state’s #-1-selling, brand of luxury flower products in 2018. To date, Mr. Sedlin has raised $30M in capital for CANNDESCENT, the company operates over 75,000 sq. ft, and it is expanding its products and brands horizontally and vertically on shelf. As CANNDESCENT’s CEO, Mr. Sedlin has established himself as an industry thought leader, serving on the board of the Desert Hot Springs Cannabis Alliance Network (DHS CAN), advising the CA Dept. of Food & Agriculture on its cultivation committee, serving as a Co-Chair on the NCIA Policy Council, appearing on CNN, FoxNews, CNBC, and Vice, writing columns for NCV, mg, and Dope Magazine. and being regularly added to lists of the industry’s Top 100 thought leaders.
Mr. Sedlin earned his BA magna cum laude from Georgetown University and his MBA from the Harvard Business School.
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