214
Continued: Sector and time based tactical tilts
Extraction: Concentrates are the fastest growing consumables category, with vaporizer products representing over 80% of the segment. Relative feature-based pricing strength supports margin growth given declining input material costs and increasingly technology-driven yield optimization. Concentrates afford convenience, discretion and portability without combustion, and consumer preferences are evident in the consistent category growth. While fractional distillation offers compelling scalable processes, the 1,500+ vape pen manufacturers pose investment destination identification challenges. Tilt: Neutral
Manufacturing: The growth in shared-use facilities has led to manufacturing eco-systems that allow brands to launch without incurring the often-costly licensing and real estate expense. The cannabis industry exhibits high growth, high fragmentation and high attraction to new entrants. As such, we expect a large growth in local brands prior to an eventual consolidation and right sizing in the market. Manufacturing facilities with professional anchor tenants provide needed incubation environments for new entrants and may enjoy sustainable margins for years to come. Tilt: Overweight
Testing: Strict and mandated testing requirements drive high profitability for licensed and equipped testing centers. Equipment shortages drive long lead times while limited licensing drives high profitability. Testing demand generally outstrips supply and supports high prices for timely testing. A high percentage of returned product means a high percentage of wasted testing expense, and this bottleneck has contributed to the development of mobile and on-site testing equipment. Tilt: Overweight