The difference between “Growth” investments and “Value” investments forms one of the central pillars of the Factor-based strategy landscape. Growth investors seek companies that offer strong earnings growth. Value investors seek stocks that appear to be undervalued in the marketplace.
It’s rare to see a group occupying the overlap between the two. However, depending on how you measure or forecast future returns on invested capital, the cannabis space may offer just such an opportunity right now.
Cannabis stocks have been slaughtered over the past half decade, with losses intensifying over the past two years. The leading AdvisorShares Pure US Cannabis ETF (MSOS) is down nearly 90% since February 2021.
And yet, BDSA recently announced an updated cannabis market forecast, which is a five-year rolling global calculation that takes into account country, state, province, channel, and category.
According to its releases and coverage, the report projects global cannabis sales to grow from $30 billion in 2021 to $55 billion in 2026, a compound annual growth rate (CAGR) of almost 13%. In the United States, cannabis sales are projected to grow from $25 billion in 2021 to $40 billion in 2026.
In addition, sales of legal cannabis in the United States were projected to jump to nearly $28 billion by the end of last year, which represents growth of more than 5% over the previous year’s sales.
Yet, in that time, stocks in the space have fallen over 50% on top of a similar drop the prior year.
The story simply doesn’t add up. And it may represent an interesting opportunity for investors looking to put fresh risk capital in play to kick off 2023.
One opportunity that could be particularly interesting as a long-term innovator trading at dirt cheap levels after a reset is ECGI Holdings, Inc. (OTC: ECGI), a Nevada-based portfolio company pivoting into the legal cannabis and cannabinoid marketplace.
The Evolution of ECGI
ECGI has been circling its wagons over the past 18 months. But we now see a revamped management team and vision in place and the sense that there’s some real pockets involved that want to do something new and impactful in the California cannabis space, which is the biggest cannabis market on the planet, pound for pound.
According to recent information put out by the company, ECGI is looking to disrupt the fundamental way the California cannabis market works.
The opportunity is there, too. Companies have over-verticalized, squeezing out smaller producers, driving pricing inefficiencies, and dealing an ugly hand to end-market consumers.
The cannabis supply chain needs a reset. It needs a new central competitor that frees up smaller grass-roots production to introduce more efficient competition into the chain, offering a better deal to retail consumers. And whoever takes leadership in that niche could find themselves holding all the cards.
As we see it, ECGI is targeting that market position, and the company is already seemingly taking tangible steps in that direction.
Recent Moves Demonstrate an Aggressive Path Ahead
According to a shareholder letter put out by the company from its CEO, Danny Wong, on Thursday, “We have made significant strides toward our goal of targeting a leadership role in product manufacturing and wholesale distribution in the California legal cannabis marketplace. We continue to believe that the legal cannabis industry in California has over-verticalized, creating a strong opportunity for disruption by tapping into the value case from smaller producers as well as the retail interface of the market.”
The letter goes on to state that, “Last month, we noted our plans to actualize our vision through a series of strategic deals and cultivated brand relationships, which will be manifest as minority stake acquisitions, exclusive licensing contracts, or similar contractual agreements that build the Company’s scale as a central player in the California cannabis supply chain… Our focus right now is on talent and asset deals that bring production and leading talent in-house to serve our market and beyond (once cross borders open up on policy). And we are closing in on finalizing such a deal.”
In addition, ECGI’s CEO went on to note that, “Another acquisition is close to being finalized as well, and centers on our exclusive licensing deal for a cannabis vape line. Our partners in this deal represent a beast of a sales team who single-handedly brought one of the most successful brands in the market to the top. I can’t wait to disclose all of the details here once the ink is dry… We are now aggressively engaged in moving this project forward, and we expect more frequent communications and the achievement of additional benchmarks now that we are current on filings and in the process of finalizing key deals.”
In other words, there’s a lot going on here under the surface in ECGI. In a prior release from December, the company characterized its model as targeting a role “something akin to the CostCo of the California cannabis market.”
It’s a sorely needed niche. And right now may represent a ground-floor opportunity for investors interested in this premise.
