Navigating the Green Rush
The emergence of publicly traded cannabis companies on major exchanges last year signaled the official arrival of the green rush. All of a sudden grandparents started asking about cannabis products, not just for their arthritis, but to capitalize on what they perceived as an untouched market. Younger demographics started to invest like never before. Between cannabis and cryptocurrency, it seems like everyone tried to win big at some point last year.
Many early investors were as misinformed as to the realities of the legal cannabis market as they were about the plant itself. The result: retail investors piled on to any company traded via a major exchange who released news of a strategic investment from a large corporation or venture capital firm. Consequently, the inflation on these pot stocks has been like little else in modern history. The investment in these companies trumps their present-day revenue capabilities and some may never reach their projections.
This year, the initial excitement has subsided slightly, replaced by late adopters looking for the perfect entry and regretfully overzealous early investors trying to decide whether to hold their position that’s taken a significant loss or jump ship. Many have seen their investments lose more than 50% within months, and others have watched that loss erased in the same amount of time.
Canada’s Big Four
Billion dollar companies with placement on the NYSE and NASDAQ have emerged from Canada. They have financial relationships with major US companies and expanding international portfolios, but tend to be unable to create enough product to meet consumer demand. I don’t anticipate this changing much until the US achieves full legalization and Amirican cannabis is listed on the NYSE.
It’s unrealistic to assume the future success of a company, regardless of fundamentals, until the market is fully formed. When I talk about the top public marijuana brands today in the next section, realize I don’t expect them all to be great investments, just solid bets.
- Cronos (NASDAQ:CRON)
Cronos is close partners with tobacco giant Altria (NYSE:MO) after a $1.8 billion investment gave them a 45% stake. Bank of America’s Merrill Lynch upgraded Cronos’s rating from a sell to a buy with a price target of $27 last week because their analysts believe Altria’s preexisting infrastructure will be the key to success in the US CBD market, which the cannabis company is preparing to enter.
While confidence from a mainstream analyst is always good for a public company, their rationale is probably a bit misguided. Gary Bourgeault of Smarter Analyst believes the potential $20 billion US CBD market is already too saturated with active players for a late entry like Cronos to capture a major share. The company also is planning to capitalize on the pending legalization of edibles and concentrates in Canada. An old Altria facility in Israel is developing vaporizers based on tech that the tobacco maker designed for nicotine, much like Juul.
Cronos Chief Executive Mike Gorenstein has some interesting US market decisions to make when it comes to his shareholders. He co-founded venture capital fund Gotham Green Partners, which has made investments in multiple US cannabis businesses including MedMen Enterprise and FlowKana. Flow Kana, one of the largest legitimate cannabis distributors in California, expects to be profitable next year and for revenue to balloon to $2.26 billion by 2022. With seemingly conflicting interests between Cronos and Gotham Green Partners, it will be interesting to see how the company aligns itself.
- Canopy Growth (NYSE:CGC)
Canopy Growth is the largest of the Canadian Big Four by market cap, assisted by Constellation Brands’ $4 billion investment, and the largest pot company in the world. Stifel analyst Andrew Carter rates $CGC a buy, along with Cronos. Canopy is building a large-scale hemp processing facility in New York, with hopes of having CBD products on the market by the end of 2019. The stock is in bear territory due to its share price, but that hasn’t stopped the rest of the US market from surging forward off of the news.
Canopy Growth secured a deal with Acreage Holding last week to buy 91% of the largest cannabis company in the US with ventures in cultivation, processing, and dispensaries. At over $40 per share, $CGC has a technical gap down to fill at $30 per share and plenty of room to run if it when it can break resistance lurking around $50. This is probably the strongest of the Big Four at the moment.
- Tilray (NASDAQ:TLRY)
Tilray recently contracted Neptune Nutraceutical for three years to provide extraction services. Neptune’s stock is currently under $6 with room to double if Tilray ever meets production goals. Tilray’s own stock plummeted from $300 a share last year to less than $50.
Steady losses have been fueled by the same problem the rest of the Big Four face, lack of production. Production has consistently failed for a laundry list of reasons: delayed government licensing, construction delays, technical errors, regulations, poor climate and I’m sure there will be new reasons in the future.
$TLRY has a partnership with Anheuser Busch owner InBev. Unlike competitors’ deals with established corporations in which the cannabis companies received actual money. Tilray’s partnership doesn’t involve an influx of cash. Instead, each company has invested $50 million of its money for a venture into nonalcoholic THC and CBD infused beverages.
In February, the company announced the acquisition of Manitoba Harvest, the world’s largest hemp food maker, for around $318 million. Manitoba Harvest’s hemp-based food products are sold in over 16,000 stores in North America, about 13,000 of which are in the United States. This was a smart acquisition that doesn’t really have anything to do with cannabis.
While Tilray has a lot going on, none of it makes me particularly excited. Maybe its that CEO Brendan Kennedy received $256 million in salary and bonuses last year as his share price plummeted, or it could be that the company has seen such a steady decline from its $300 share price less than a year ago. As the shining example of the general inflation these publicly traded instruments experience, often fluctuating 50% or more in just a quarter, Tilray may actually be reasonably priced now for some steady growth.
- Aurora Cannabis (NYSE:ACB)
Aurora Cannabis, the Big Four leader in sales, acquired Canadian competitor CanniMed for $1.1 billion in January. The company says they are focused on what they believe is impending legalization of edibles, topicals, and concentrates in Canada, which they expect could be worth nearly 3 billion in combined sales. In the meantime, Aurora is mostly ignoring the US market but well positioned in Europe. They own Agropro, Europe’s largest hemp producer, and European hemp processor and distributor Borela.
Steiffel analyst Andrew Carter wrote recently that he believes Cronos and Canopy have best positioned themselves for the future through their partnerships with Altria and Constellation respectively. He agrees that the US market will determine the future of publicly traded cannabis companies with more than $50 billion in revenue up for grabs. I agree with this outlook, but I also think the best opportunities for retail investors may be outside of these cannabis companies themselves.
There are a couple of publicly traded products that stand out to me for nationwide US exposure. One play is to capitalize on the current CBD-based medication being prescribed in the US. The other is to attempt to utilize what may be the greatest pre-existing infrastructure for cultivation, production, and distribution in the country.
GW Pharmaceuticals (NASDAQ:CRON)
GW Pharmaceuticals occupies a unique position as the lone maker of CBD-based medication in the United States. Epidiolex was approved by the FDA last year and is the only drug of its kind available on the US market. GW Pharmaceuticals has a history of producing pharmaceutical cannabis drugs. Their THC:CBD preparation Sativex is widely available by prescription across Europe and Canada. If you want to invest in the medical side of the market, this is your only ticket for now.
Altria owns a 45% stake in Cronos. They have an infrastructure of cultivation and distribution like no other across the globe due to their preexisting tobacco business. Tobacco farmers make perfect hemp cultivators and their land is prime for cannabis in much of the country.
Altria’s United States connections are of particular importance due to their decades of lobbying experience. In fact, it’s well known they have been forging relationships throughout the nation’s capital for years in preparation for cannabis legalization, hoping to leverage their farming network into the nation’s leader in marijuana cultivation.
Altria also has a 35% stake in ultra successful nicotine vapor company JUUL. The vapor product has grown in popularity exponentially since debuting in 2015. Their sales increased 75% last year alone with strong support from teens, who are sixteen times more likely to use a JUUL compared to older age groups.
Altria’s products are in about 230,000 stores. Cronos plans to use this network to roll out CBD creams, tinctures, and vape pens once they get production up to snuff. Tobacco stocks have suffered in recent years, making their shares a relative value. Investors may be waiting five to ten years to see federal cannabis legalization in the US, but I can’t help but think Altria is poised to skyrocket in value when it happens.
Broad Exposure ETFs
For now, the immediate opportunity in investing in publicly traded companies is in exploiting their volatility. Much like Tesla, shares often respond in large value fluctuations to the smallest piece of news, while their underlying fundamentals remain unchanged. $14 in $CRON could quickly become $50 with news of the right acquisition or investment. It could also be $7 very soon if growing facilities continue to miss demand numbers. No one expected Tilray’s massive run last year, and even fewer predicted its colossal sell-off.
As I mentioned several times, the volatility in this industry is no joke. Only experienced traders should feel confident playing with the rapid dives in value standard for publicly traded marijuana companies. For everyone else, even the shrewdest purchase of a publicly traded cannabis company on a major exchange is still speculation.
Alternative Harvest ETF (NYSE:MJ)
One of the best ways to reduce the volatility and avoid inflated prices is by using an Exchange Traded Fund (ETF). Bought and sold like a stock, an ETF invests in multiple public companies hopes of outpacing industry growth with limited risk. Several ETFs invest solely in the cannabis industry. The Alternative Harvest ETF boasts placement in the New York Stock Exchange. Their fund invests heavily in the Big Four as well as in the main sectors of the industry:
- Plant touching – involved in the actual production and distribution of marijuana.
- Pharma/biotech – create cannabinoid-based medicines.
- Ancillary – provide supplies and equipment to marijuana producers.
- Service – provide real estate, consulting services, and technology.
Alternative Harvest maintains holdings in Phillip Morris, Altria, and over 40 other companies. $MJ is up nearly 50% this year alone, and I expect it to grow steadily, if not as rapidly as individual companies, as long as the marijuana industry continues to evolve. The fund can add companies at will so this ETF helps you gain exposure to future American cannabis.
SAFE Banking Act
I good sign for US legalization came last week in the form of a federal banking bill. The Secure and Fair Enforcement Banking Act received placement on the Union Calendar of the House of Representatives, which indicates that a full floor vote is coming. The SAFE Banking Act would block federal agencies from prohibiting, penalizing, or discouraging a bank from providing financial services to marijuana-related businesses. The legislation would also allow insurance companies to provide coverage.
We still have a long way to go, but those who get in the winners early have the opportunity for some life-altering profits. I can’t tell you that any publicly traded pot stocks are suitable investments, but I can tell you there is money to be made. I hope my insights on some of the top publicly traded cannabis stocks helps in formulating a risk tolerance approach to capitalize on this emerging industry.
“Better Buy: Aurora Cannabis vs. Scotts Miracle-Gro Company.” Yahoo! Finance, Yahoo!, 9 June 2019, finance.yahoo.com/news/better-buy-aurora-cannabis-vs-130000056.html.
“CEO of ‘The Starbucks of Weed’: If ‘You Don’t Get a Piece of Cannabis, Cannabis Is Going to Take a Piece of You.’” The Motley Fool, www.fool.com/ext-content/investor-alert-if-you-dont-get-a-piece-of-cannabis/1288/?psource=esafbwdg0211368&utm_campaign=cb-cbbeverage-ret-opa-all-jump&campaign=sa-cannabis-boom&fbclid=IwAR259-q_BXvfn9-78I0aZu9SHbEN0q4S4HidN71n67ueGF1sy67u5_-Xc7g&paid=9200&utm_content=Jump_Image_esafbwdg0211368_Headline1_Copy2_i:(167)&utm_source=facebook&waid=9200&utm_medium=contentmarketing&testId=cb-beverage-advert&exitpop=false&wsource=esafbwdg0211368&cellId=0&autoplay=false.
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“New Study: Teens 16x More Likely to Use JUUL than Older Age Groups.” New Study: Teens 16x More Likely to Use JUUL than Older Age Groups, truthinitiative.org/press/press-release/new-study-reveals-teens-16-times-more-likely-use-juul-older-age-groups.
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