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Sept. 26, 2019, 8:55 a.m. EDT

Your investing guide to cannabis 2.0

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By Michael Brush, MarketWatch


Hexo
Hexo’s Decarb is a powder to add to drinks or sprinkle on salads.

The most popular cannabis stocks rallied as much as 20% from washed-out levels that one analyst identified as “capitulation lows” on Aug. 28.

Then the bad news about lung ailments related to vapingturned worse and grabbed more headlines. Cannabis vapes are often implicated. So the ETFMG Alternative Harvest exchange traded fund /zigman2/quotes/204332491/composite MJ -2.27%  has fallen even below late-August lows, compared with 4% gains for the S&P 500 /zigman2/quotes/210599714/realtime SPX +0.77%  since then.

So much for “capitulation lows.”

Read: Cannabis ETF falls toward record low, longest-ever losing streak of 8 sessions

But the renewed weakness in volatile cannabis stocks means they look attractive again for at least two reasons.

First, very bullish developments for cannabis companies are about to play out in Canada. Dubbed cannabis 2.0, edibles, vapes and drinks will be legal, probably by the end of the year. Companies will start announcing new lines of products as early as October. Canada also is significantly increasing the number of cannabis stores.

Canada is the market that matters for investors, since publicly traded cannabis companies steer clear of the U.S. due to legal restrictions. Expect enthusiasm for cannabis stocks to build between now and early next year, when products hit the shelves in Canada in a big way.

Second, the scary vape news is a positive for companies that want to be big players in cannabis vapes, since consumers will see them as trusted, reliable suppliers. They’re more likely to produce safer vapes, compared with unregulated manufacturers that cut corners. Dodgy additives are probably responsible for the health problems among vapers. As people understand this, the vape cloud over cannabis stocks will dissipate.

Which cannabis companies will get the most lift from cannabis 2.0? Your best bet: Those that have a shot at being the Coca-Cola or Pepsi of cannabis. Branded edibles, vape and drinks command higher profit margins than cannabis bud, a commodity.

“You are going to have a few large brands coming out of this that everyone loves,” says Korey Bauer, portfolio manager of the Cannabis Growth mutual fund /zigman2/quotes/208282024/realtime CANNX -2.26% . Just like in the beer and spirits market, there will also be craft and specialty brands, says Motley Fool investment analyst Emily Flippen. “We are still in the early days of what will be a very big industry. Strong brands will define success.”

Cannabis companies with the best shot at developing brands are those partnering with companies that already know about brand development from experience. Here’s a roundup of the top contenders and their key partners, plus some “picks and shovels” companies.

Canopy Growth /zigman2/quotes/200603886/composite CGC -3.22% : The “king” of vapes, drinks and edibles

Key partner: Constellation Brands /zigman2/quotes/207737284/composite STZ -1.76%  

/zigman2/quotes/200603886/composite CGC 15.33, -0.51, -3.22%

Canopy plans a big push into vapes and cannabis drinks with its partner Constellation Brands, which distributes Corona. Canopy says its drinks will offer better dose control and bioavailability. Expect new cannabidiol (CBD) products, too.

Canopy has been developing products for years, but it hasn’t shared many details. That will start to change in October. “We look forward to showing what we’ve been working on,” says interim CEO Mark Zekulin. We may see promotions by Snoop Dogg and Seth Rogen, Canopy partners.

Canopy Growth recently booted out co-CEO Bruce Linton. Bauer thinks Canopy will bring in a CEO with a background in consumer products or pharmaceuticals to help develop branded drinks, edibles and vapes. “I see them as the king of the space,” says Bauer.

Flippen at Motley Fool thinks it’s better to get exposure to Canopy by owning shares in Constellation, which has a 38% stake in Canopy.

Read: Canopy Growth’s remaining CEO talks about pot company’s shake-up, and the search for his replacement

Hexo /zigman2/quotes/206508254/composite HEXO -5.29% : Vaginal sprays, THC drinks, and lots of Ph.D.s

Key partner: Moslon Coors Brewing /zigman2/quotes/205165133/composite TAP +2.38%

/zigman2/quotes/206508254/composite HEXO 1.79, -0.10, -5.29%

Hexo isn’t joking around about developing cannabis drinks, edibles and vapes. It has more than 25 chemists and food scientists with Ph.D.s working on it. Hexo plans to ramp that up to 100.

/zigman2/quotes/204332491/composite
US : U.S.: NYSE Arca
$ 16.80
-0.39 -2.27%
Volume: 1.38M
Nov. 15, 2019 8:00p
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/zigman2/quotes/210599714/realtime
US : S&P US
3,120.46
+23.83 +0.77%
Volume: 1.87B
Nov. 15, 2019 5:04p
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/zigman2/quotes/208282024/realtime
US : U.S.: Nasdaq
$ 4.76
-0.11 -2.26%
Volume: 0.00
Nov. 15, 2019
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/zigman2/quotes/200603886/composite
US : U.S.: NYSE
$ 15.33
-0.51 -3.22%
Volume: 8.34M
Nov. 15, 2019 6:30p
P/E Ratio
N/A
Dividend Yield
N/A
Market Cap
$5.33 billion
Rev. per Employee
$115,039
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/zigman2/quotes/207737284/composite
US : U.S.: NYSE
$ 179.65
-3.21 -1.76%
Volume: 1.85M
Nov. 15, 2019 6:30p
P/E Ratio
46.58
Dividend Yield
1.67%
Market Cap
$34.01 billion
Rev. per Employee
$842,260
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/zigman2/quotes/206508254/composite
US : U.S.: NYSE
$ 1.79
-0.10 -5.29%
Volume: 3.69M
Nov. 15, 2019 6:30p
P/E Ratio
N/A
Dividend Yield
N/A
Market Cap
$460.05 million
Rev. per Employee
N/A
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/zigman2/quotes/205165133/composite
US : U.S.: NYSE
$ 52.52
+1.22 +2.38%
Volume: 1.83M
Nov. 15, 2019 6:30p
P/E Ratio
74.20
Dividend Yield
4.34%
Market Cap
$11.36 billion
Rev. per Employee
$606,738
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