Beyond the Bong

Vaping-Related Fatalities Stress Importance of Marijuana Regulation

It’s been less than a month since I warned investors about the vaping crisis.

In the days since, the number of vaping-related lung illness cases has erupted.

Currently, there are more than 450 cases of the respiratory illness across 33 states. Meanwhile, the number of potential related deaths has swelled to at least six.

This is particularly concerning because the first death caused by e-cigarette use was just reported in late August. So this situation has progressed rapidly.

Now, even though no specific e-cigarette has been named in all cases, all of the lung illness cases have involved e-cigarettes. Including some that use THC.

Needless to say, the nationwide outbreak has sparked swift reactions from the government and the marijuana industry.

The Ban Plan

The medical professionals I’ve interviewed over the years are not fans of vape pens and e-cigarettes.

To create concentrates and oils, you need to add chemicals. And the question has always been, “How safe are those additives?”

Lab tests from the New York State Department of Health have discovered that the cannabis-containing samples showed extremely high levels of vitamin E acetate. And these were from candy-flavored cartridges.

Vitamin E acetate – as well as other chemical additives like propylene glycol (PG) and vegetable glycerin (VG) – is a popular thinning agent used in e-cigarettes and vape pens.

The problem is, the data on the damage done when these additives are inhaled is limited. Though, we do know that when PG and VG are heated to a high temperature, they degrade into cancer-causing byproducts formaldehyde, acetaldehyde and acrolein.

That’s bad.

Now, New York Gov. Andrew Cuomo has subpoenaed three companies that manufacture thickening agents for e-cigarettes and vape pens. And he’s advancing legislation to ban flavored e-cigarettes.

But New York is far from riding solo here.

The American Lung Association is warning that e-cigarettes are not safe and cause “irreversible damage.”

Our friends at the National Cannabis Industry Association (NCIA) are calling on Congress to step up and regulate cannabis in light of these vape-related deaths.

NCIA Executive Director Aaron Smith stated, “These unfortunate illnesses and deaths are yet another terrible, and largely avoidable, consequence of failed prohibition policies… These policies are directly bolstering the markets for untested and potentially dangerous illicit products.”

And the White House announced that it’s planning to ban all e-cigarette flavors, including menthol. Though it will take a couple of weeks for the Food and Drug Administration to get the final ban in place.

This will add to the woes vape sellers are already feeling.

Headline Moves

The headlines pushed shares of tobacco and cannabis stocks lower. And for good reason.

As we’ve pointed out here, vape cartridges are the second-bestselling cannabis product. In fact, they’ve accounted for a quarter of all sales this year…

Chart - Best-Selling Cannabis Products

Data already shows that vape sales have fallen steeply in California, Colorado, Nevada and Washington in light of the outbreak.

Meanwhile, companies like Medicine Man Technologies (OTC: MDCL) are calling on states to ban chemical additives. Additives are used as diluents or viscosity modifiers, or to carry flavors.

Companies such as Medicine Man, Bloom Farms, CannaCraft, Cobra Extracts and Dosist have been quick to point out that they’ve never used vitamin E, PG, VG or similar chemical additives in their vape pen products.

In the government’s eyes, nicotine vaping is considered a health crisis. Roughly a quarter of all high school students admit to vaping.

There are no long-term studies about the effects this might have. But this is likely only the first health concern related to e-cigarettes and nicotine vaping. And that will impact the cannabis markets.

I believe this is another situation where the federal government is going to be forced to make a move to regulate the cannabis industry. That’s actually something the sector welcomes.

Regulation helps remove bad actors and illicit market participants.

It sets up dosing, manufacturing and safety standards.

And regulation returns confidence to consumers.

The High Five

Below are this week’s High Five, where – each Monday – I cover the five pot stocks I believe will make major moves – up or down – in the week ahead.

1) Cronos Group (Nasdaq: CRON) made headlines in December when it received a $2.4 billion investment from tobacco mega-company Altria. This was for a 45% stake in the Canadian licensed producer.

2) Altria (NYSE: MO) is moving into pot to boost its waning cigarette sales in the U.S.

After it bought a massive piece of Cronos, the tobacco company announced it would discontinue two of its e-cigarette lines – MarkTen and Green Smoke.

But Altria also carries the risk of Juul Labs. Days after taking its stake in Cronos, the tobacco major announced it was buying a 35% stake in Juul for $12.8 billion. Juul is already under fire from the feds for allegedly marketing its flavored e-cigarettes to children.

3) mCig Inc. (OTC: MCIG) shares were pummeled last week following the e-cigarette ban announcements.

The microcap penny pot stock provides a wide range of solutions for the industry, from lighting to cultivation supplies, as well as VitaCig inhalation technology. In August, the company announced it was rebooting the VitaCig brand with “Cool Citrus” and “Stress” capsules.

4) Auxly Cannabis Group (OTC: CBWTF) received a CA$123 million investment from British tobacco giant Imperial Brands. This was for a 19.9% stake in the cannabis company at CA$0.81 per share.

More importantly, it gave Auxly immediate access to Imperial’s vape technology. And it will be the tobacco company’s exclusive partner in developing cannabis companies worldwide.

5) KushCo Holdings (OTC: KSHB) is often mistakenly considered a one-dimensional packaging supply company for the cannabis industry. But it is much more than that. Its vape products have been one of its big drivers, representing more than 50% of total revenue.

Sentiment over cannabis vaping is going to impact KushCo shares.

As always, we like to compare the performance of our High Five with the benchmark Horizons Marijuana Life Sciences Index ETF (OTC: HMLSF).

After the sell-off in August, pot stocks have enjoyed a rebound in September. But they’re still in the red for the past month…

Chart - The High Five

Our benchmark marijuana exchange-traded fund (ETF) is down more than 10% since mid-August.

Shares of Cronos have performed a hair worse. Meanwhile, mCig has really struggled, losing more than a third of its value. And KushCo has dipped almost 15%.

But Altria has slipped just 3%, outperforming the cannabis sector. And Auxly is flying high, gaining nearly 4.5% over the past month.

After selling off in August, the broader markets are in rebound mode.

The Dow Jones Industrial Average has gained nearly 1,000 points already in September. And it is now up more than 3.5%.

The Nasdaq – the most volatile in the face of trade wars and recession fears – has surged 3.6%.

And then the small caps of the Russell 2000 have really blasted off, skyrocketing 5.3% so far in September.

Of course, pot stocks haven’t been left behind. The Horizons Marijuana ETF has surged more than 5.5% this month.

But as so often is the case with cannabis, there’s a new dark cloud looming over the industry. And we’ll be looking for clearer skies ahead, whether that comes from federal regulation or the industry regulating itself.

If you have a pot stock in mind that you’d like me to discuss here, leave a comment below.

Here’s to high returns,

Matthew