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Cannabis Pull-back, Cannabis Buying Opportunity

Jeff Nielson Jeff Nielson, Stockhouse
3 Comments| October 24, 2018

After nearly a century of Prohibition, the recreational use of cannabis (for adults) has now been legalized – with October 17, 2018 being “cannabis day” in Canada. Meanwhile, valuations for most cannabis companies have suddenly pulled back sharply.

Click to enlarge

Does this make any sense? Of course not.

Pseudo “experts” in cannabis will claim that this sudden plunge in these stocks represents profit-taking with companies whose valuations had been excessively stretched due to the over-exuberance of investors. Nonsense.

The explanation above makes perfect sense for what transpired in the sector at the end of 2017. In a matter of weeks, valuations virtually across the entire sector spiraled to multiples of previous prices. In addition to the sheer magnitude of this jump, there were no strong fundamental drivers of higher valuations for cannabis stocks at the end of 2017. At that time, investor sentiment was being fueled exclusively by future expectations.

The situation today could not be more different from the end of 2017.

In 2017; the (initial) investment in Canopy Growth Corp. (TSX: WEED) by beverage-giant, Constellation Brands was credited by many as the trigger for 2017’s end-of-the-year blow-off rally. In 2018; not only has Constellation Brands made a second investment in WEED (20 times as large as its first investment), but several other multinational beverage giants have made deals with Canadian cannabis companies – and a number of other large beverage companies are rumored to be strongly interested in their own cannabis deals.

At the end of 2017; the enabling legislation for the legalization of recreational cannabis in Canada had not even been passed. Today, cannabis Prohibition is officially over, and the world’s most useful/versatile plant species can now be fully commercialized (in Canada) for the first time in a hundred years.

A year ago, cannabis legalization was not a certainty. The campaign promises of politicians frequently don’t come to fruition. Today, Canadians are buying cannabis from retail stores – and Canadian LP’s are beginning to reap millions in revenues from official supply agreements with provincial governments.

Then there is the United States. One year ago; the “U.S. cannabis industry” was nothing more than a patch-work corporate landscape characterized by radically different cannabis laws state-to-state and continued, relentless cannabis obstructionism from the U.S. federal government.

Click to enlarge

Today, there is the U.S. Farm Bill 2018. While prejudice and paranoia concerning marijuana is still strong throughout much of the United States, enlightenment appears to be finally creeping into this equation with respect to hemp.

This legislation has already received U.S. Senate approval. Even if final approval doesn’t come this year, the normalization of hemp laws in the United States now appears inevitable. This would immediately create the world’s largest single market for the commercialization of the world’s most-versatile plant: hemp.

In short, a year ago the cannabis industry was still a story about potential markets. Today, these markets are materializing in North America, and many other regions of the planet are not far behind in normalizing their cannabis laws.

This just represents the new potential that is now visible for this industry. In terms of medicinal use, it’s already evident that cannabis has only scratched the surface of its potential as:

  • Formally licensed and approved pharmaceutical products
  • A near-infinite assortment of cannabis health & wellness products

On the pharmaceutical side of the cannabis industry, even a single drug success can represent a pay-day in the $100’s of millions. With cannabis being a safe/benign substance (cannabinoids are produced naturally in the human body) cannabinoid-based drugs are especially safe and well-tolerated. In turn, this will tend to reduce both drug-development costs as well as speeding up the process for commercializing cannabinoid drugs.

An exaggerated example of the potential of cannabis biopharma can already be seen with Tilray Inc. (NASDAQ: TLRY). With NASDAQ valuations once again completely divorced from reality, TLRY has spiked by as much as a factor of eight since its IPO in July.

While Tilray’s valuation is absurdly rich in relation to its level of development, the valuations for numerous Canadian-listed cannabis companies are simply too low. Cannabis investors have watched as most of these publicly listed companies have spent the majority of 2018 giving back 2017’s end-of-the-year gains.

Meanwhile, a large number of these companies have continued to aggressively (and successfully) scale-up operations. The run that many cannabis stocks enjoyed starting in August did not represent companies whose share prices were being jacked-up on investor exuberance alone. These are companies whose valuations have been catching up to reality after many months of slipping lower.

Many investors are now climbing aboard the cannabis bandwagon. Among the more reluctant “passengers” are a number of high-profile analysts and financial management professionals – most of whom have near-zero expertise with respect to the cannabis space.

These late-comers are now attempting to position themselves as authorities in this sector, despite what is clearly a superficial level of understanding of this industry. It is these high-profile voices who are making most of the noise with respect to the (supposed) “overvalued” state of the cannabis industry.

Ignore them. Many of these born-again cannabis analysts were previously among the loudest detractors of the long-term potential of this industry, at a time when the enormous scope of opportunity here was already visible to more informed commentators.

Click to enlargeA century of corrupt and artificial cannabis Prohibition is now essentially over and the world’s most useful plant species is beginning to be commercialized. The economic opportunities here won’t be exhausted in a few years, or even a few decades.

The Cannabis Revolution that is now occurring around the world is more than a social/legal revolution. It is also an economic revolution, since cannabis can (and will) become an important component of many of our largest industries.

  • Medicine
  • Adult recreational drug
  • Food
  • Textiles
  • Nutritional supplements/cosmeceuticals

Many cannabis stocks have dipped sharply since October 17th, yet all that has changed over this span is that the cannabis industry has become a bigger/better investment opportunity. This means that cannabis pull-back = cannabis buying opportunity.


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Hi Jeff, I'm down 40% on v.wmd after your "BEST reason to buy" article. Do I keep holding?
October 26, 2018

Finally, somebody that makes sense on the subject !
October 26, 2018

Loading up new industry health and recreational possibilities
October 25, 2018

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