Industrial Highlight: Soft drinks and marijuana stocks

coca-cola-marijuana

Brian Messing, Managing Editor

Eric Parks, Section Editor

 

Ever wonder what you should do with your extra cash? Save it? Spend it? How about invest it? Each issue, we will each cover an industry that we choose to highlight that we believe would make an excellent addition to your investment portfolio. This month, we will cover the soft drink industry and the marijuana industry.

Within the soft drink industry, despite consumer preferences shifting away from sugary beverages, these companies are looking to diversify their portfolios to stay relevant, as one of the more “establishment” picks when it comes to the stock market. Look no further than Coca-Cola (NYSE: KO), of which Warren Buffet’s Berkshire Hathaway (NYSE: BRK) owns 9.4 percent. Today couldn’t be a better time to jump in on Coke either. Shares fell around 9.5 percent in mid-February, after Coke released a slightly below average estimate for earnings in 2019. This was largely attributed to the aluminum tariffs implemented by President Trump. As soon as the United States and China negotiate a new deal, which is in the best interest of both countries, Coke will be well on its way to beating the very conservative estimates it made for 2019, which is something that Wall Street always likes.

In addition to this, Coca-Cola has many other tangible benefits that can easily be overlooked. Coca-Cola has been paying dividends to investors since 1920, and has been annually increasing dividends since 1963. This has led some to label the stock as “the dividend aristocrat.” Currently, Coca-Cola has a dividend of 3.29. Finally, Coke’s brand and presence on an international scale gives it plenty of prime opportunities for expansion.

Another stock in the soft drink industry that is worth looking at is PepsiCo (NASDAQ: PEP). Unlike Coca-Cola, PepsiCo does more than just sell beverages.  The company is a fairly diversified conglomerate, with other food and beverage holdings including Frito-Lay, Tropicana, Quaker Oats, and Gatorade. Pepsi has also invested in healthier alternatives, as consumers shift their preferences away from less sugary and fatty snacks and drinks. Although its dividend yield is lower than Coke’s, it is closer than it has ever been before at 3.25.

The third largest competitor in the industry is Keurig Dr. Pepper (NYSE: KDP). The company recently formed after the merger of the Dr. Pepper-Snapple Group and Keurig, and it boasts a diverse array of beverage products. There is also a lot of room for potential expansion. With the vast majority of its sales coming from within the United States, international expansion could be very profitable because it is largely unchartered territory. Critics warn that over 80 percent of the companies sales come from its soda segment, warning that diversification would be necessary as consumers shift away from sugary drinks.

Another industry that deserves the attention of every investor is cannabis. In the United States, cannabis is a schedule I substance, which makes founding and investing in companies that cultivate and sell the plant very difficult. Marijuana was first legalized for recreational use by Washington and Colorado in 2012, and since then, eight other states, as well as the District of Columbia, Canada, and Uruguay have followed suit. That brings access of recreational marijuana to over 100 million people of age in only six years. Additionally, 23 other states and 16 countries legalized marijuana for medical use in some form, and several others have “decriminalized,” or removed criminal penalties related to the drug. Decriminalization and legalization for medical purposes are seen as stepping stones toward recreational legalization, which significantly increases the legal access for cannabis, and has created an intriguing and rapidly growing cannabis industry.

While the legal market for cannabis will likely continue to increase, there are several major risks associated with investing in these businesses. Companies in the United States that deal with marijuana are unable to open accounts with federally-insured banks, because the drug is still illegal at the federal level. Therefore, banks are unwilling to gamble on these businesses, which makes large chain dispensaries and production nearly impossible, significantly hindering short term investment opportunities. There are no stocks listed on American stock exchanges that grow or sell marijuana in America. This limits investors to target Canadian companies or pharmaceutical companies that deal strictly with cannabidiol (CBD).

CBD is a non-psychoactive, but controversial substance found in cannabis. It is not technically regulated in the United States, because tetrahydrocannabinol (THC) is the chemical that marijuana’s famous “high” is caused by. CBD is currently under consideration by local, state, and federal lawmakers, rendering CBD pharmaceutical companies highly volatile.

The risk could be worth the reward, though, especially in the case of Cara Therapeutics (NASDAQ: CARA). Cara has several drugs currently undergoing clinical trials by the FDA, and all are based on CBD. One pill, Korsuva, would treat uremic pruritus, which is associated with chronic liver and kidney diseases. Cara entered a partnership with Vifor Fresenius Medical Care Renal Pharma, which is a global leader in treating chronic kidney disease. Korsuva has earned the Fast Track designation from the FDA due to its success in Phase I clinical trials and because there are no viable treatments for uremic pruritus. Another drug from the company uses CBD as a pain reliever. Traditional painkillers fall under one of two categories: opioids and non-opioids. Non-opioid pain medications, such as Ibuprofen, are often not strong enough for patients suffering from chronic pain. Opioids generally are; however, they have recently come under fire from governments around the world due to the opioid epidemic. While the drug Cara is working on is technically an opioid, it functions differently. Traditional opioids, such as Vicodin and Percocet, target mu opioid receptors, while Cara’s substance, CR845, targets kappa opioid receptors. There are early signs that the change in targeting which opioid receptors for controlling pain could be enough to significantly decrease addiction levels, as well as other opioid side effects, such as nausea and dizziness. While the market potential for Cara is very tempting, there is no guarantee that these drugs will become FDA-approved or are effective. Cara is a fantastic stock for investors looking for boom-or-bust potential.

Those who are not looking to dive into clinical pharmaceutical companies, but still want to catch the wave of the cannabis boom, could be interested in foreign companies. One popular stock is Canopy Growth (NYSE:CGC, TSE:WEED), which is a leader in Canadian marijuana production. Canopy Growth has grown rapidly in the wake of recreational legalization in the country, including a major investment from Constellation Brands (NYSE:STZ), an American corporation that has a large market share of the alcohol industry. Canopy could be well positioned to enter the US market if marijuana laws are federally relaxed. On the other hand, an upcoming Canadian election could affect marijuana’s outlook in that country too, and Canopy Growth’s stock has been extremely volatile over the past year. A recent increase in research on marijuana could also be good or bad news for the drug, depending on what studies find. While this industry has extreme short- and long-term potential, it could also easily crash.

As of writing this, Brian Messing holds a position in Coca-Cola (NYSE: KO).

As of writing this, Eric Parks does not hold any positions in any of the previously mentioned securities.

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