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Know How Beverage Stocks Will Gain From Shift to Marijuana

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The marijuana (or Cannabis) industry is witnessing a boom driven by increasing awareness and acceptance of the drug in many parts of the world. The latest to join the list of the countries that have legalized recreational marijuana is Canada – the second nation to allow its full legalization. With the legalization expected to be effective from Oct 17, many companies in the neighboring United States, including beverage producers, are bracing up to bolster their presence in Canada and the marijuana segment.

Legalization Status in the United States

The use of marijuana or Cannabis remains illegal at the federal level in the United States. Currently, recreational marijuana is legal in only nine states of the United States and the District of Columbia, while about 30 states have legalized its medical use. However, many states are presently under pressure for its legalization as the health-conscious U.S. population is gaining awareness of the health benefits of cannabis.

Further, analysts predict the Cannabis market has significant growth potential in days to come as the legalization of pot is catching up. Per research firm Euromonitor, sales for legal marijuana products are likely to reach $20 billion by 2020 in the United States alone, up from $5.4 billion in 2015. Notably, legal pot sales grew a massive 57.4% to $8.5 billion in 2017. Further, analysts expect the legal sales of marijuana in the United States to rise about 29.4% in 2018, reaching nearly $11 billion.

This has made Cannabis a hot favorite not only for the masses, but also for several companies as well as investors.

Why U.S. Beverage Industry Eyes Strong Gains from Marijuana?

Cannabis has become a great attraction for the big players in the U.S. beverage industry. The increasing popularity of cannabis-infused drinks, in contrast with the huge decline in demand for beer and sugary sodas is probably the key reason for the beverage companies’ interest.

Traditional beverage makers, both alcohol and soft drinks, have witnessed terrible declines in the sales of their products lately due to the shift of consumer preference toward healthier options. Notably, the alcohol segment is suffering due to lesser demand for beer. On the other hand, sugary sodas have been witnessing declines as consumers prefer non-carbonated and health drinks.

Reports reveal that soda sales have declined to the lowest level in more than 30 years in the United States. Sales of the carbonated soft drink category, including the diet versions, witnessed a huge fall in 2016 as consumers preferred to buy bottled waters and healthier beverages. Initial decline in full-calorie sodas was met by the introduction of diet sodas, which were once a savior for the industry. However, soon consumers grew skeptical about the use of artificial sweeteners, which worsened the situation.

A majority of brewers too are witnessing declines in beer sales volumes so far this year, which is weighing on financial performances. The Brewers Association revealed that U.S. beer volume sales dipped 1% in 2017, while craft beer sales volumes improved 5%.

However, we note that the overall picture for beer sales has deteriorated in 2018 as is evident from soft sales volumes reported by several beer giants, including Budweiser maker Anheuser-Busch InBev (BUD - Free Report) , Craft Brew Alliance (BREW - Free Report) , and more. Looking more closely, while the overall sales volumes of another biggie Boston Beer (SAM - Free Report) have been stable, its flagship Samuel Adams beer brand has been lagging.

These factors have left both alcohol and soda makers scramble for options to satisfy changing consumer preferences. Soda-makers are essentially looking to revamp their portfolio to include what Americans drink today. Consequently, we have many new ventures in the industry, where the giants — PepsiCo (PEP - Free Report) and Coca-Cola (KO - Free Report) — have added juices, flavored water, sparkling water and others to their portfolio, either through acquisitions or new partnerships.

For example, Coca-Cola’s recent bet on buying Costa Coffee for $5.1 billion, speaks volumes of the company’s intent to explore the on-the-go coffee business. Meanwhile, rival PepsiCo has plans to enhance its sparkling water portfolio with the acquisition of the leading carbonated drink machine manufacturer, SodaStream for $3.2 billion.

Coming to brewers, we see players like Boston Beer, Brown-Forman (BF.B - Free Report) and Constellation Brands (STZ - Free Report) gaining from their diversified portfolio that include spiked & sparkling waters, wine, whiskey, and other spirits. Additionally, beer makers are now concentrating on introducing flavored varieties with low-alcohol content, alongside diversifying to include non-alcoholic beverages and energy drinks in their portfolio.

Undoubtedly, Cannabis has emerged as an attractive alternative to the problems of the players in the U.S. beverage space, given the health benefits it offers. Cannabis-infused drinks are gaining popularity as consumers consider the medicinal value of the drug as a great addition to their drinks. This makes the marijuana market a great investment option for traditional beer and soda firms.

How Cannabis-Infused Drinks Can Benefit Beverage Companies

The Cannabis plant is used to extract chemicals like cannabidiol (“CBD”) and tetrahydrocannabinol (“THC”), which can be used a component in beverages. Of these, CBD is a non-psychoactive chemical present in marijuana, which has several health benefits. On the other hand, THC is a psychoactive ingredient that causes intoxicating effects on users, giving them a high.

CBD is mainly used for medicinal purposes around the world to relieve inflammation, pain and cramps. There is an increasing awareness about the use of CBD to treat chronic pain, anxiety and even epilepsy in children. Given its benefits, the first-ever marijuana-based treatment is likely to be launched in the United States soon, as epilepsy treatment by GW Pharmaceuticals Plc has been approved by regulators in June. Additionally, a research by the American Cancer Society suggests CBD even inhibits rapid spread of cancer.

While cannabidiol-infused drinks will be the obvious choice for soda and health drink makers, THC can be used by alcohol companies to provide its customers a high along with the health benefits of cannabis.

Beverages-Cannabis Ventures So Far

With the new wave of cannabis-infused drinks, we have seen some interesting tie-ups by U.S. beverage giants, mostly alcohol, and Cannabis companies. The most notable among these is Constellation Brands’ $5 billion investment to bolster its stake in Canada’s Canopy Growth Corp. (CGC - Free Report) from 9% to 38%. The Corona beer seller’s huge investment in the biggest listed marijuana company clearly confirms its focus on building a global cannabis platform with Canopy.

Additionally, we have Molson Coors’ (TAP - Free Report) joint venture with Hydropothecary Corp., which targets producing and selling of non-alcoholic cannabis-infused drinks in Canada after legalization. Moreover, Heineken (HEINY - Free Report) has launched Hi-Fi Hops, a cannabis-infused sparkling water, in California (where recreational marijuana is legal).

Extending the marijuana movement to non-alcoholic beverages, we saw Coca-Cola jump on the bandwagon, revealing its interest in producing cannabidiol-infused functional wellness beverage. The company, like its counterparts, is currently exploring the cannabis-infused market. Analysts believe this might be a big opportunity for Coca-Cola to come out of the dark and replenish its portfolio and sales graph.

Out of the stocks mentioned above, Constellation Brands, Molson Coors and Coca-Cola carry a Zacks Rank #3 (Hold), while Heineken and Canopy Growth carry a Zacks Rank #4 (Sell).

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Other Options to Catch the Marijuana Movement

There is no doubt that the marijuana movement is likely to gain momentum in the near future. Obviously, the pure-play marijuana stocks have witnessed strong runs lately, which cannot be ignored. Some of the leading names in pure-play marijuana that have soared due to the growth of this market are Cronos Group (CRON - Free Report) , Canopy Growth, Tilray TLRY and Aurora Cannabis. Clearly, the U.S.-listed stocks of these companies have significantly outperformed the broader market’s year-to-date growth of 8.6%. Tilray has surged 856.1%, while Canopy Growth and Cronos followed with increases of 108.6% and 38.4%, respectively.

Marijuana Stocks Year-to-Date Growth

Bottom Line

We would brace up for a great marijuana marathon ahead, waiting to see who gains and who loses. While there are do’s and don’ts for any game, the real winners play it right and make it to the top spot.

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