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Stock Market Trend Forecast Oct - Dec 2019 by Nadeem Walayat

Is There Life Left In Cannabis

Commodities / Cannabis Oct 08, 2019 - 05:48 PM GMT

By: Joshua_Rodriguez

Commodities A year ago today, the cannabis sector was booming. Everyone seemed to want a piece of the sector that was sure to continue flying in the long run. The only problem - that wasn’t the case!

As soon as Canada legalized adult use cannabis, it seemed as though all the hopes of strong sales flew out of the window. Aurora Cannabis (ACB) traded at more than $11 per share in mid-October, 2019. By mid-December, it had fallen to under $5 per share. Canopy Growth (CGC) hit highs of more than $55 in October, falling to under $27 per share in December. Tilray (TLRY) was trading at more than $175 per share in September of 2019, By December, it had fallen to below $70 per share and is now trading at around $30 per share.

With the exception of stocks like Tilray, most cannabis stocks are trading on gains over their December lows, but a dark cloud of overvaluation and regulatory speculation is still hanging over the sector.

Does this mean that there’s nothing left for investors in cannabis? I don’t think so. It just means that if you want to get into this emerging, multi-billion dollar sector, you’ve got to think outside the box.

Where Most Cannabis Investors Are Looking

There’s no doubt that most cannabis investors are looking at large Canadian players like Aurora, Tilray and Canopy Growth. In my view, this is a big problem.

While we have seen substantial declines from mid-October highs in Canadian pot stocks, there’s a very real argument that these stocks are still tremendously overvalued. Most in the sector are trading at more than 50 times forward looking revenue.

From a fundamental standpoint, there’s a demand issue starting to lead to concern. With major cannabis growers all working to take their share of the space, we’re seeing increased production capacity across Canada. As supplies rise, the law of supply and demand tells us that the price must fall. So, reducing dried flower prices are likely to cause pain in forward-looking revenues.

Bulls argue that the supply issue will level out once the United States Federal Government legalizes adult-use cannabis nationwide. Sure, that’s a great idea, but the idea is built around speculation. Let’s remember, there’s a republican president in office and republicans have been known to be against cannabis.

The bottom line is that overvalued Canadian cannabis companies are not a good bet at the moment. With speculation-fueled arguments and ridiculous valuation metrics, it’s likely best to stay away.

Where Investors Should Be Looking

While Canadian cannabis plays are just about dead on the vine, I believe that there’s quite a bit of opportunity right here at home. In fact, smaller, American companies are poised to run for multiple reasons.

In the United States, cannabis is illegal federally. However, there are several states that have legalized the use of marijuana for medical purposes, recreational purposes, or both. These markets have combined values in billions of dollars annually.

On the other hand, these companies have largely been starved of investment dollars as the larger investing community focused on Canada. This has led to large undervaluations in a market that could be just as large, if not larger.

Here are some great examples:

Vapen MJ (VAPNF): A Growing Brand Presenting Opportunity

Vapen MJ is a recently public company, and while the market hasn’t quite reacted to the opportunity, there’s real promise here. The company is focused on the production of cannabis and various cannabis products, including THC and CBD cartridges, edibles, flower, and more, but there are plenty of other companies doing that. What makes Vapen special?

From the beginning, the company has had an unmatched focus. At first, the company focused on the Arizona market, taking the region by storm. The company had such success in the region, that it has caught the attention of mainstream celebrities, including Wiz Khalifa, Cardi B, and several others.

With the Arizona market tapped, the company is looking to the larger opportunity, expanding its brand across the United States. The company has signed agreements to bring its brands into Nevada.. It is also in process of bring its brand into larger markets like California, Ohio, Massachusetts, Oklahoma  and Michigan, only further expanding the opportunity.

Importantly, the company is already generating profit, something that wasn’t seen in the Canadian cannabis sector until very recently, while stocks were already trading on billion-dollar valuations. Not to mention, the stock trades with a market cap that’s just 2.3 times its 2019 revenue run rate of $27 million, speaking volumes to its undervaluation!

Charlotte’s Web (CWBHF): A CBD Play Worth Your Attention

On the other side of the spectrum, we have Charlotte’s Web. Instead of focusing on the cannabis side of the equation, the company is heavily focused on the CBD space.

Due to the passage of the 2018 United States Farm Bill, hemp, and hemp derivatives, including CBD were legalized for production and sale. Even before this was the case, Charlotte’s Web was manufacturing and selling CBD products in states where the hemp-derived compound was approved.

The company offers a long line of products including salves, lip balms and much more. Considered to be a top-notch brand, Charlotte’s web products can be found on the shelves of multiple national retailers, including CVS and Kroger.

As Charlotte’s Web continues to expand its retail footprint, taking hold of the national CBD market, the company is presenting an opportunity that’s hard to ignore.

The Bottom Line

The bottom line here is simple. Canadian cannabis stocks are getting all of the attention, but they don’t deserve it. These stocks are largely riddled with overvaluations and driven by speculation that global regulations will change ahead. On the other hand, there are plenty of opportunities here in the United States that offer a real opportunity for growth!

This article is a paid advertisement. Read our full disclosure here.

By Joshua Rodriguez

© 2019 Copyright Joshua Rodriguez - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

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