With 2019 coming to a close, there’s a good chance that cannabis stocks will be wrapping up with a whimper rather than a bang. Many of the big name companies have had a rough year, and a number of issues still plague the industry.
With that said, it’s important to note that this is still a very young industry with plenty of opportunity. We’ll be covering what went wrong this year, some things you need to keep in mind when investing, and our five picks for cannabis stocks you should consider buying before 2019 comes to a close.
2019 – A Year In Review
If you were paying attention around this time last year, you most likely remember the hype – with legalization in Canada right around the corner, many were predicting that this would be the year stocks would skyrocket.
To say that this hasn’t been the case would be an understatement. 2019 has not been kind to the cannabis industry. This includes many of the giants that you’re no doubt familiar with, as both Cronos Group and Canopy Growth have taken a pretty substantial tumble over the last 9 months.
So, what happened?
Part of it has been a mismatch between expectations and reality. According to George McBride, CEO of Handy Associates “the early movers in cannabis that listed their stocks a few years ago did so at a fortuitous time and were able to raise a lot of money astronomically fast. But they grew very quickly and now sales have not matched investor expectations”.
Then there was the disastrous year for CannTrust. In what may well have been the biggest story of the year for the industry, the company (one of the largest licensed producers in Canada and a huge player in medical cannabis) got caught growing and harvesting unlicensed product. Since the summer scandal, CannTrust has since seen its license suspended by federal regulators.
Add to that the hysteria surrounding people dying from (black market) vape products, and it’s easy to see how a series of unfortunate events really did a number on the industry this year.
Finally, there’s the insidious persistence of the black market. Despite the promise of doing away with the illicit trade, legal businesses in Canada continue to struggle in claiming business from their underground competitors.
Cannabis Stock Tips For Beginners
Before we touch on which stocks we think are still good buys for the remainder of 2019, here’s a quick primer if you’re new to investing in cannabis.
Having a general understanding of the industry is critical. There are a few different ways to slice it up, but a good initial distinction to make would be between businesses that “touch the plant” (growers, cultivators, dispensaries, and infused-products manufacturers) and “non-plant touching” or “ancillary” businesses (cannabis-focused media and marketing, legal and financial services, etc).
The ancillary industry is widely regarded to be far less risky than the plant touching industry. Despite the tremendous progress in legalization efforts over the last few years, cannabis is still considered a Schedule 1 drug in the US, and these businesses tend to have an easier time securing funding.
They also represent a massive chunk of the total industry. A 2016 Deloitte report found that the ancillary market could potentially grow to become 2.5 times the size of the plant touching sector.
With that said, plant-touching businesses are becoming less and less volatile the more the industry progresses, and represent a ton of growth potential and opportunity in their own right (particularly when it comes to the edibles and concentrates market).
There’s also the distinction between recreational and medical companies.
Medical marijuana has the advantage of being legal in more places (over 30 states) than recreational (11 states) in the US, as well as being federally legal in far more countries (there are well over 20 countries with legal medical marijuana programs).
With medical cannabis, you’ll often be looking at a longer investment timeline, thanks to the lengthy research process involved in developing new products.
The advantage of the recreational market is that it’s not restricted to specific patients, and there are far more potential customers if legalization trends continue the way they’ve been going.
5 Stocks To Consider Buying In 2019
#1 – Aphria
While many of the major producers have had a pretty rough year, one of the outliers was Aphria. The company not only had a profitable fourth quarter (something that can’t be said for a lot of its competitors like Aurora), but has also shown a consistent increase in revenue and earnings.
Aphria has also shown an interest in partnerships with major players. Last year the company paired up with great Great North Distributors, a subsidiary of Southern Glazer’s Wine and Spirits, one of the biggest liquor distributors in North America.
#2 – Plus Products
Plus Products is a major player in the edibles industry. As one of the fastest growing brands in the hyper competitive market of California, they’re currently looking to make inroads in other markets, both in Canada and the US, and have identified Florida, Michigan, Massachusetts, and Nevada as areas of interest.
While Plus Products stock is currently undervalued, the company has access to quite a bit of cash, high market share, and plans to launch a CBD line in the near future. And with both CBD and edible THC poised to be booming markets (especially with legalization 2.0 on the horizon in Canada) this is one stock to watch for if infused products are something you’re interested in getting in on.
#3 – Innovative Industrial Properties
Operating as a real estate investment trust and focusing on medical cannabis, Innovative Industrial Properties is an ancillary company that currently does business in New York, Pennsylvania, Michigan, Minnesota, Maryland, Massachusetts, and Arizona.
IIP is also very healthy financially, and is looking to expand – the company just struck a new deal in Michigan with LivWell Holdings, purchasing a 156,000 square foot property and leasing it to their licensee, LivWell Michigan.
#4 – Village Farms International
Rather than looking strictly at the major companies in the industry, you may seriously want to consider checking out the smaller players with high growth potential.
Village Farms International is a small scale Canadian producer. The company got its start growing vegetables, and has shifted its focus into cannabis over the last few years, having paired up with Emerald Health Therapeutics . With solid earnings in the second quarter this year and plans to expand, stocks in Village Farms are definitely something worth considering.
#5 – Curaleaf
Curaleaf is a vertically integrated medical cannabis company. Operating in 12 states with 49 local dispensaries, the American company has seen very positive growth, and is poised to be one of the few cannabis companies to do $1 billion in sales in 2020. And with the recent acquisition of Alternative Therapies Group for $50 million, Curaleaf is in a very healthy position financially, and definitely another winner in the medical cannabis space.
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