The Cannabis Stock Market Is Growing Up

Cannabis company stocks have piqued the interest of the international mainstream, in large part due to Canada’s landmark legalization of cannabis. The hype is further boosted by consistent progress at a state level in the US, and high hopes for similar scenarios in many European nations. The consequent demand for medical, nutraceutical and recreational products will potentially drive big earnings for cannabis companies. The ones listed on stock exchanges will see the price of their stock go to the moon, making the smart stoners who bought those securities much richer and happier. Right? No, wrong.

Thanks to the due normalisation of the plant, huge growth across a few vertical markets is easily forecasted. Cannabis pharmaceuticals, adult use, beauty and healthcare, nutraceuticals, pain and sleep control, and likely some other sub-sectors will thrive in the legal cannabis global market. Even Big Pharma, Big Tobacco, and Big Beverage boys can’t hide their interest in this huge business. Yet this doesn’t mean there’s room for everyone. And first of all, it doesn’t mean cannabis stock prices will go any higher from where they are trading right now, despite any worldwide developments.

THE TECH BUBBLE LESSON

Just like many new industries entering the markets, the whole cannabis sector is subject to speculation and huge fluctuations in stock prices, at least until the sector finds a balance. This, of course, can take several years. The lesson learned with tech stocks in the late ‘90s is that even successful leaders of industry struggle to maintain the high stock price they reach when hype is at its max. In other words, Microsoft stock reached its height of 58 dollars at the end of 1999, while today it sits at $36, and it’s unlikely to fluctuate greatly in the future because Microsoft is not a “growth company” anymore. Microsoft and other companies from the tech industry boom are now global giants that keep rewarding their investors and stock traders, but if you bought any tech stock in 1999 and kept it in your portfolio, right now you wouldn’t be so happy about your investment.

So what about cannabis stocks? Well, a good example is Tilray, who entered the Nasdaq with a booming initial public offering that brought the stock to over 200 USD in September 2018, only to fall to 100 USD at the end of November. Does this mean people discovered they sell crappy hemp? Not likely; but if you now have to sit and wait for the price of this stock to recover 100% of its actual value, then Tilray’s weed tastes awful to you.

As opposed, if you invested in the cannabis industry over the past couple of years, there's a good chance that you are making some money, since many cannabis stocks have grown in price over the last 3 years. The bottom line is, “timing is crucial”. And by the way, back to the Microsoft example, it’s good to know that if your mom or grandpa had invested one month’s wage in a tech company back in the ‘70s and sold their stocks in 2000, you probably wouldn’t need to work today. This is the power of being early birds in emerging markets.

RISKS AND OPPORTUNITIES OF AN EMERGING INDUSTRY

The cannabis industry is very young. Early birds can have difficulty understanding the various business models, and financial information provided by businesses is not always straightforward and transparent. Cannabis stock prices are subject to huge fluctuations due to general market sentiment and the dynamics of worldwide cannabis reform. Furthermore, none of these cannabis companies are making profits right now, thus their stock price relies exclusively on forecasted earnings in a highly competitive market that has just started to be regulated.

While a few companies were already listed on secondary trading markets, in 2018 the first cannabis businesses were listed on the major American stock exchanges NYSE and Nasdaq. Cronos Group started trading on Nasdaq in February and Canopy Growth was listed on NYSE in May, followed by Tilray in June who entered the market as the first cannabis growing company raising capital via a Nasdaq listing. Since then, a bunch of new cannabis players have started crowding the main exchanges in New York and Toronto, and the less regulated OTC markets as well.

Many cannabis enthusiasts, or simply money enthusiasts, are throwing their bucks at cannabis stocks, fearing missing out on big gains. But most of these people do not have investing experience, or have taken the time to research each company’s financial and business information. Going over data and corporate documents is not easy, and most people don’t have complete access to this information. As a result, the average private investor places their bet on something they don’t know. This is not necessarily bad—just be aware of it.

THE GREEN RUSH

Stock markets can be approached as a trader or as an investor, or maybe as something in-between. As long-term investments, cannabis stocks provide next to zero guarantees of returning the invested money; thus, they are a great place to put some money you really, but really, won’t ever need. On the other hand, a cannabis stock trader can have fun with these stocks, as much as with thousands of other financial assets made for trading.

Despite most cannabis stocks today being Canadian, the companies listed only on the Toronto Stock Exchange are not mentioned here because investing in the Canadian stock market might be complicated for an individual based in Europe. However, several Canadian companies are listed both on Toronto and New York exchanges. The stocks trading on OTC minor exchanges are not listed here either; their extreme volatility and low liquidity make them a very risky and, after all, inconvenient trade. Ok, it’s now time to take a look at the most-traded cannabis stocks and their business model.

• 22nd Century Group Inc. (NYSE: XXII) is a biotechnology company developing technologies that allow increasing or decreasing the level of nicotine in tobacco plants—and cannabinoids in cannabis plants—through genetic engineering and plant breeding. The company has proprietary hemp strains with less than 0.3% THC. 1 year performance: + 30% / 3 months performance: +12%.
• Canopy Growth Corp. (NYSE: CGC) was formerly known as Tweed. Its products include flowers, oils, concentrates, and softgel capsules. The company offers its products under various brand names such as Tweed, Black Label, Spectrum Cannabis, DNA Genetics, Leafs By Snoop, Bedrocan Canada, CraftGrow, Foria. 1 year performance: +145% / 3 months performance: -24%.
• Cronos Group Inc. (NASDAQ: CRON) is a financial company that invests in cannabis businesses able to produce medical cannabis in compliance with Canada's regulations. 1 year performance: +180% / 3 months performance: -5%.
• Tilray Inc. (NASDAQ: TLRY) engages in the research, cultivation, processing, and distribution of medical cannabis in Canada and several other countries like Argentina, Australia, Chile, Croatia, Czech Republic, Germany, New Zealand, and South Africa. 1 year performance: not applicable / 3 months performance: +57%.
• Cannae Hldg. (NYSE: CNNE) is an investment firm that acquires stakes in technology, healthcare services, restaurants, financial services, and other businesses related to the cannabis market. 1 year performance: -4% / 3 months performance: -10%.
• Aurora Cannabis (NYSE: ACB) is active across various segments of the cannabis value chain, from facility design to cannabis breeding, production, processing, product development, wholesale, and retail distribution. The company has global operations in 19 countries. 1 year performance: -1.5% / 3 months performance: -13%.
• Aphria (NYSE: APHA) produces and sells medical cannabis to patients and health professionals in Canada and several other countries. 1 year performance: -8% / 3 months performance: -38%.

SMALL PHARMA GROWING UP

Several pharma and biotech companies have started to work with natural and synthetic cannabinoids, resulting in fully developed products or candidates undergoing clinical trials. Here is a short selection of pharma companies that are fully involved in the development of drugs targeting the endocannabinoid system.

• GW Pharmaceuticals PLC (NASDAQ: GWPH) was founded in 1998 and is based in the UK. GW is the European leader in developing cannabinoid prescription medicines derived from the cannabis plant. Epidiolex and Sativex are its lead products. 1 year performance: +50% / 3 months performance: +42%.
• Arena Pharmaceuticals (NASDAQ: ARNA) is a biopharma company, with part of its research oriented on cannabinoid medicines. Its new drug Olorinab addresses Crohn’s disease, targeting the CB2 cannabinoid receptor. 1 year performance: +32% / 3 months performance: -6%.
• Cara Therapeutics (NASDAQ: CARA) is a biotech company with a few drugs in the clinical stage, such as a cannabinoid receptor agonist being studied as a treatment for neuropathic pain. 1 year performance: +46% / 3 months performance: -10%.
• Intec Pharma (NASDAQ: NTEC) developed an oral drug delivery technology that can be used to deliver CBD and THC to treat various conditions. 1 year performance: -19% / 3 months performance: -15%.
• Zynerba Pharmaceuticals Inc. (NASDAQ: ZYNE) is a small pharma company developing transdermal cannabinoid treatments for rare or near-rare neuropsychiatric disorders and certain refractory epilepsies. 1 year performance: -65% / 3 months performance: -40%.
• Insys Therapeutics (NASDAQ: INSY) has a few synthetic cannabinoid-based drugs coming down the pike, and spent hundreds of thousands of dollars trying to slow down cannabis legalization in the US, while pressing for a looser regulatory framework for synthetic cannabinoids. 1 year performance: +13% / 3 months performance: -35%.

ANCILLARY SERVICES: INVESTING IN THE TOOLS

There are a number of services and product providers coming from outside the cannabis industry that have gotten on board since legalization gained traction. Most of these companies are considered hybrid plays since their business is not strictly focussed on the cannabis industry. But they would benefit a lot from strong growth in this sector. Plant nutrition, pest control, facility management, lighting systems, and hydroponics are some of these ancillary services and products.

• Scotts Miracle-Gro Co. (NYSE: SMG) is a provider of gardening products that’s been focussed in the last few years on entering the cannabis market by acquiring companies in sub-sectors like hydroponics. 1 year performance: -23% / 3 months performance: +2%.
• Marrone Bio Innovations Inc. (NASDAQ: MBII) is a producer of pest-control and plant health compounds, with one business line focussed on cannabis pests such as powdery mildew and mites. 1 year performance: +38% / 3 months performance: -27%.

DRINKS AND TOBACCO

It is safe to say that all major tobacco and beverage corporations have their plans to enter the cannabis market as soon as it looks proper. Tobacco corporations are experiencing a decline in their traditional business, and for sure they won’t miss this train. As an example, Altria (NYSE: MO) is the company that makes Marlboro cigarettes, among many others. After being interested in buying a minority stake in the Canadian cannabis company Aphria, the tobacco giant may want to buy cannabis company Cronos Group, even if at the moment the companies have not yet reached an agreement. These kinds of rumours usually generate big swings in cannabis stock prices, which can be traded for a profit, or a loss.

• Coca-Cola (NYSE: KO) declared it was considering CBD as a possible ingredient for a new generation of wellness beverages, while there used to be rumours of its possible investment in Canadian company Aurora Cannabis. In the meantime, Constellation Brands (NYSE: STZ), which makes Corona beer, raised its stake in Canopy Growth by 38% with a 4 billion USD investment. Constellation Brands’ 1 year performance is about -10%, while its 3 months is around -6%.
• New Age Beverage (NASDAQ: NBEV) develops and markets “healthy” beverages. The company has announced a line of CBD-infused drinks, and its stock price has been soaring. 1 year performance: +104% / 3 months performance: +112%.
• Youngevity International Inc. (NASDAQ: YGYI) is a lifestyle company with a hybrid business model and a range of food, beverage, beauty, and wellness products. In August 2018, Youngevity announced entering the cannabis industry with the launch of its Hemp FX product line and its stock had a nice rally. 1 year performance: +45% / 3 months performance: +90%.
• The Canadian branch of Molson Coors (NYSE: TAP) has a solid joint venture with The Hydropothecary Corporation to produce cannabis drinks for the Canadian market; Lagunitas, the beer brand owned by Heineken, is selling cannabis-infused sparkling water in California. Cheers!

INVEST, WITH NO HURRY

It will take a few years before the leaders and the fast growers really emerge in the stock markets. Today, it seems wise to focus on companies with at least an adequate capitalisation, without relying upon press releases or social media hype. Except for the drinks and tobacco giants, and a few others, most of the cannabis companies are in a startup phase, and they can show zero earnings.

Even in the most optimistic worldwide legalization scenario, it is unlikely all these companies will generate enough profit to justify their actual price/future earnings ratio. Yet, this shouldn’t prevent us from scoping out future leaders and placing a bet as a long-term investment. Likewise, an experienced trader might want to buy some cannabis stock on their upward momentum, aiming to sell after a few hours, days, or weeks for a quick gain on the market hype.

Finally, it is also possible to invest in ETFs like Horizons Marijuana Life Sciences Index and ETFMG Alternative Harvest. These are funds that contain selected cannabis stocks and can be bought or sold online just like any other security, avoiding the risk of being invested in a single, or in just a few, companies within the sector. Whatever financial tool you decide to use, we have to reiterate that investing and trading stocks is a rational task that requires a little knowledge. Buying a security driven by your heart is not a good way to try and make some money!