THE MULTIBILLION DOLLAR marijuana industry continues to grow rapidly as the number of states legalizing the adult use of cannabis increases, more companies listed on the Canadian market and hemp companies gain popularity.
The budding sector is expanding as more hemp manufacturers gain traction.
Canada legalized the recreational use of marijuana in 2018 and sales began last October. While the Canadian cannabis industry was surging for several months, the U.S. companies who operate dispensaries in multiple states are now making progress and earning a higher profit margin.
The three different types of marijuana stocks an investor should add to a portfolio include U.S., Canadian and hemp stocks. Here are a few trends within these three types of stocks:
- U.S. cannabis stocks could surge.
- Canadian marijuana stocks could pull back.
- Hemp companies gain traction.
U.S. Cannabis Stocks Could Surge
Several U.S. companies are operating in more than one state and are known as multistate operators, known as MSOs.
Investors have shifted their focus from the Canadian market to the U.S., says Jason Spatafora, co-founder of Marijuanastocks.com and a Miami-based trader and investor. The market was propped up by Canadian operators for the past two years, but now U.S. marijuana companies are increasing revenue and profit margins, he says.
U.S. marijuana companies will benefit from the States Act, which is a bill that would allow each state to determine its cannabis regulations.
“You’re going to see a lot of these companies outperform Canadian stocks because California has more population than Canada,” Spatafora says. “The U.S. companies will start outpacing and catching up to Canadian companies.”
Investing in MSOs such as Trulieve Cannabis Corp (ticker: TCNNF), Harvest Health & Recreation (HRVSF), Acreage Holdings (ACRGF) and Curaleaf Holdings (CURLF) is a good idea, but not a definite home run, he says.
Since the vesting period for restricted stocks from private placements for institutional and high-net-worth individuals ends for some of the companies soon, investors need to be cautious.
When more shares of these companies are available to the public and are unrestricted, it will dilute the value or market capitalization of the company, he says.
“These four stocks have all gone public within the last year and they all have cliff vesting that needs to come out,” Spatafora says. “The companies are enjoying nice market caps right now. I will like them a lot more when the dust settles and they have traded for a full year.”
Trulieve’s vesting period ends on July 25 and while Spatafora is a fan of the pot stock, he recommends waiting to buy TCNNF’s shares afterward.
“There is never enough demand when the supply hits the market,” he says. “If $200 million shares hit the market, there is never going to be enough people to sustain that type of pressure, then those shares dilute the stock and make it harder for the stock to move up. Investors need to understand this and have a sense of how many shares are hitting the market and what price it was purchased at.”
Trulieve is a good addition because the company is “completely dominating in Florida with tons of patients and the company has a good reputation,” Spatafora says. In Florida, the use of medical marijuana is legal, but the state, which has a lot of tourists, could legalize recreational use in the future.
Both Acreage and Harvest are stable companies operating in several stables. Acreage has the benefit of having both former House Speaker John Boehner and former Massachusetts Governor Bill Weld on its board.
“Acreage will crush it and is planting flags all over the U.S.,” he says.
Curaleaf Holdings has a price target of $11 per share after its first-quarter earnings report based on store count, average anticipated revenue and wholesale business expectations, said Brett Hundley, a managing director and senior cannabis/ingredients analyst at Seaport Global Holdings in his June report.
Green Thumb Industries (GTBIF), a Chicago-based cannabis consumer packaged goods company and retailer, has a buy rating from Seaport Global, which increased its price target to $19 a share from $18 after its first-quarter earnings report.
“We make updates related to our forward view on store count, average anticipated revenue, wholesale business expectations and a number of other factors,” says Hundley in a June report.
According to Hundley’s report, the net result will be modest changes to the fiscal 2019 year sales and earnings before interest, tax, depreciation and amortization (EBITDA) expectations combined with increases for the fiscal 2020 year.
“Our 2020 EBITDA estimate increases to $103.1 million from $82.5 million,” he writes on GTBIF.
Companies that focused on the cannabis-concentrate opportunity and are selling into multiple states have the most promise, says Michael Berger, founder of Technical420, a Miami-based company that researches on cannabis stocks.
Vapen MJ Ventures (VMVCF), an Arizona-based agricultural technology, services and property management company, Stem Holdings (STMH), a Florida-based cultivation, processing, extraction, retail, and distribution company, and Halo Labs (AGEEF), an Oregon cannabis oil company, are “attractive plays on the U.S. market that have substantial growth prospects, he says.
The cannabis market is going through a cycle of high and low times, Spatafora says.
“Proceed with caution, stay active and take profit,” he says. “These stocks are not like AT&T (T) where you can buy it and forget about it.”
Canadian Marijuana Stocks Could Pull Back
While Canada’s more favorable regulations allow U.S. companies to list on their exchanges, the cannabis-focused market is “more about execution,” Spatafora says.
Canadian marijuana companies, especially the smaller ones, could wind up defunct unless they have a good product and are acquired.
“Investors have given the benefit of the doubt for a while for a lot of these companies and that patience is starting to run out,” he says.
The Organic Dutchman (TGODF), an organic cannabis producer, is still a good addition to a portfolio because its marijuana is a premium product and still has the highest margins out there, Spatafora says.
What sets TGODF aside from its competitors is that the company is paying a fraction of the costs on electricity – one of the largest costs in producing cannabis is paying for expenses such as lighting and water. Its partnership with Hamilton Utility Corp. means its power cost has been reduced from 13 cents per kilowatt-hour to less than 5 cents at its Ontario facility.
The Supreme Cannabis Co. (SPRWF) is a diversified portfolio of cannabis companies, products and brands.
“They are a wholesaler and everyone raves about the quality of their cannabis,” he says. “They are the number one candidate for acquisitions.”
While Supreme Cannabis may have missed “a lot of the upward share price mania of the last few years, but it did so because it was focused on building a real business and that’s becoming really important now,” says Chris Parry, a Canadian-based consultant in technology, health care and marijuana marketing.
The company will be profitable soon, while its competitors are watching their losses climb, he says.
“Their product reviews are incredible. [They] have ample cash in hand. And while their figures are fairly close to Cronos Group (CRON) in revenue and profit/loss, their market cap is like a fifth of Cronos,” Parry says.
WeedMD (WDDMF) is “one of the best-positioned Canadian licensed producers when it comes to the cannabis concentrate and the outdoor cultivation opportunity,” Berger says.
“From a genetics standpoint, the proprietary cannabis strains owed by WeedMD are some of the best available and this is an important aspect of the story,” Berger says. “WeedMD is rapidly expanding its production capacity and is trading at a discount when compared to the leading Canadian players.”
A global expansion story with locations ranging from Australia to Germany, Aleafia Health (ALEAF) has significant leverage to the Canadian and the international cannabis opportunity, he says.
“Aleafia Health has been gaining institutional interest and this is a trend that we expect to become more significant as revenues continue to ramp,” Berger says.
Hemp Companies Gain Traction
Hemp is the cannabis plant and can be used for industrial purposes such as building energy-efficient homes and plug up cracks in infrastructure, has a low barrier to entry and various applications such as food and beauty products, Spatafora says.
The product has another advantage because companies can create brands that can be sold in various states.
“How can anyone argue with a product that is really sturdy and used to create the first draft of the Constitution?” he says.
1933 Industries (TGIFF), a Vancouver-based cannabis company, has been taking the hemp and the cannabidiol market by storm, with its Canna Hemp subsidiary and scale, with its products being sold in more than 800 stores across the U.S., Berger says.
“The company just moved into a facility that is 10 times larger than the previous one, and 1933 Industries will be able to become one of the largest premium hemp brands on the market,” he says.
1933 Industries has a “nice hemp component and is undervalued, considering their revenue,” Parry says.
But these two large hemp plays are not public yet, Parry says. Those companies are Hemp Fusion, a Boulder, Colo.-based hemp and cannabidiol-based company, which distributes to more than 3,400 retailers; and Hemptown USA.
“Hemp Fusion is a part of the group that brought you Organigram, Emblem, TGOD and Plus Products, and they don’t do things by halves,” he says.
Hemptown USA, a West Coast hemp producer, is a massive Oregon-based farm play with matching revenue, Parry adds.
The company is “by far one of the best hemp companies as it plans to cultivate more than 500 acres of rare high-cannabigerol genetics,” Berger says. “Following this harvest, the company will be positioned as one of the largest producers in North America.”
CBG currently sells for around $20,000 per kilogram compared to the $4,000 price tag associated with a kilogram of cannabidiol.
“By being one of the only companies to focus on the production of CBG, Hemptown will be able to protect itself from potential price compression and we find this to be a very attractive [way to differentiate],” he says.
