Long Cannabis In The Coming Recession by Michael A. Gayed

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(Edited)

Summary

  1. Big tobacco, with Altria one of its strongest players, was always up there with the consumer staples greats.
  2. Big tobacco has strong cash flow, but has no growth. Cannabis has the growth, but it needs the investments.
  3. We may enter a period where volatile cannabis stocks actually act more stable like other consumer staples companies should it take the role of a “needed” consumer items.
  4. This idea was discussed in more depth with members of my private investing community, The Lead-Lag Report. Start your free trial today »

Stability is more essential to success than brilliance. -Anish Roy

The consumer staples sector is comprised of companies that make the most necessary and most regularly used products. Food, beverages, drugs, tobacco (and perhaps cannabis), essential household products, and the sellers of the above, such as Walmart (WMT), all constitute the category. The regularity and necessity of purchase of these products make consumer staples producers a good defensive investment during recessionary times. Whereas cyclical brands such as Ferrari (RACE), Louis Vuitton and Las Vegas Sands (LVS) will all experience hardship as the consumer tightens his or her belt, companies such as Procter & Gamble (PG), Johnson & Johnson (JNJ), Altria Group (MO) and others in the consumer staples sector, will likely not. The opposite is true as well - during times of expansion, consumer staples companies underperform, as can be seen in the graph below.

Image Source

The economics of consumer staples companies rests on three pillars. Economies of scale is one. Since consumer staples are mass consumption products, the producers enjoy very strong economies of scale, with revenues upwards of $10 billion per year, and a global marketing infrastructure, which equate to very high barriers to entry for would-be competitors. Economies of scope is the second pillar. Major consumer staples companies are conglomerates incorporating dozens and dozens of brands each. Economies of scope allow for greater stability of earnings over time due to income stream diversification. It allows for the creation of a multi-dimensional offering, such as the Coca-Cola fridge, offering every major soft drink category: Water, juice, and soda. Finally it creates the corporate infrastructure necessary for creating, launching and nurturing new brands under a single trust umbrella.

...Read the Full Article On Michael A. Gayed's Blog on Seeking Alpha

Author Bio:

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This article was written by Michael A. Gayed. An author on Seeking Alpha and founder of the Lead Lag Report.

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3 comments
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The cannabis space is just like the crypto space, huge upside, but the kinks need to be ironed out first before reaching its full potential.

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