Investors have heard a lot of big projections for the cannabis space. Cannabis, and cannabinoid-based medications are going to revolutionize healthcare. Cannabinoid-based supplements can claim a large chunk of overall market share in the dietary supplements market (estimated to reach $278.02 billion by 2024).
As a benign recreational drug (non-toxic and non-addictive), cannabis has unlimited potential to take market share from the $2 trillion per year alcohol and tobacco markets. For the Opioid Crisis, cannabis can replace opioids for certain conditions -- as medicine. It can also replace alcohol as a recreational drug option for people who need to use opioids, reducing the horrendous body count that is being produced by alcohol + opioids.
Then there is hemp: the world’s most useful and (potentially) single most-valuable crop. Hemp already had thousands of known industrial uses. Then came the revelations concerning the cannabinoid “cannabidiol” (CBD). Hemp is especially rich in CBD, while containing negligible quantities of THC, the mildly psychoactive substance in the cannabis plant.
More and more, CBD is taking shape as both a miracle-medicine and extremely potent health supplement. Dozens of cannabis companies are presently developing hundreds of CBD-based medicines and supplements, and (in terms of the supplements) these are already penetrating markets.
Just the seeds to grow CBD-rich hemp strains retail for up to US$30,000 per pound. Literally worth their weight in gold.
On the regulatory front, U.S. obstructionism aside, the end of cannabis Prohibition marches onward across much of the globe. Nothing can put this genie back in the bottle because there was never the slightest (legitimate) justification for cannabis Prohibition.
All of this is true.
The rebuttal from cannabis investors is obvious. If cannabis is such a great investment opportunity, why are cannabis valuations (virtually across the board) heading in the wrong direction right now?
The partial answer to this is that markets have generally been turbulent and trending solidly lower in recent weeks, around the world. In markets that are now totally dominated by the algorithm trading of the Big Banks, “market independence” is now an archaic concept.
Another part of the answer is bad information.
A lot of high-profile analysts – who know virtually nothing about the cannabis sector – have been taking regular “pot shots” at this industry. Compounding this, the Corporate media has created a new generation of anti-cannabis propaganda, to conceal its own culpability as a mouthpiece for a hundred years of anti-cannabis propaganda.
In Canada, with cannabis now completely legal (for adult use), the Canadian government has chosen to saturate the Canadian population with devious propaganda. That propaganda continues to imply that cannabis is somehow “dangerous” and that a century of cannabis Prohibition was not simply a manifestation of political corruption.
In short, the anti-cannabis propaganda being circulated today is just as prevalent as the anti-cannabis propaganda when cannabis was still (unjustifiably) totally illegal. This poisoning of investor sentiment toward cannabis has been exacerbated by opportunistic short-sellers who see this new wave of anti-cannabis propaganda as a path to easy money.
What does this mean to cannabis investors? One strong possibility is a massive short-squeeze for the semi-informed predators who are currently shorting cannabis stocks.
2019 outlook
The same Corporate media that is taking (seeming) delight in spreading around a new, thick layer of anti-cannabis manure has also been forced to acknowledge that Canada is facing a massive cannabis shortage that “could last years”. Anecdotes like the following can be found in most parts of Canada.
More Edmonton cannabis stores face supply shortages; demand ‘way more than anticipated’
Let’s expand on that observation, for the benefit of any Cannabis Skeptics. With Canadian cannabis companies expanding cultivation operations as fast as possible, it could take years just to address the current supply shortage in this country.
When resource investors hear about a “long-term shortage” in a particular market, what do they do? They pile into that sector. Any supply shortage automatically implies two bullish fundamentals: rising prices and a major window for growth in that industry.
If cannabis valuations remain soft for any extended period, this will impair the development of the entire Canadian cannabis industry – and extend this cannabis shortage for additional months/years. Any way you slice this scenario over the longer term, all roads lead to robust cannabis growth, robust cannabis growth opportunities, and rising share prices for the companies in this space.
For cannabis investors who are looking for another reason to be bullish about cannabis stocks despite current valuations, consider this: you’re still part of a minority. Like any new industry, it takes a while before that industry becomes “mainstream” for the average investor.
Delaying this process in attracting new investors to cannabis is 100 years of cannabis Prohibition, 100 years of anti-cannabis propaganda, and 100 years of residual bias among our populations. Even at Stockhouse (with a large and strong Community of cannabis investors), in a recent Investor Pulse Poll, 1/3rd of respondents identified themselves as “not investing in cannabis stocks”.
Cannabis valuations currently look terrible today. Cannabis sentiment has significantly weakened – at least among more marginal cannabis investors. But what about the fundamentals going forward?
For Canadian cannabis cultivators, efficient operations can produce cannabis at or below $1 per gram. With respect to provincial wholesale agreements for the (new) Canadian recreational market, prices at the bottom end of this market are rumored to be well above $2 per gram. Even at the wholesale level, margins are strong enough to fuel additional growth.
In the medicinal market, where Canadian cannabis companies can do more direct retailing, prices range from ~ $6 to $15 per gram. And those are just the margins for dried flower.
The Canadian cannabis industry is accelerating toward much greater cannabis extraction capacity. This massive expansion is not only to supply much higher margin products for the medicinal cannabis market but also in anticipation of a new, legal (non-medicinal) market in Canada for cannabis-infused edibles and beverages.
These additional products -- and markets -- offer margin potential that is multiples of the available margins in the dried flower market. With respect to some of the cannabis-infusion business models that have already been rolled out to investors, relatively modest quantities of raw cannabis can generate huge volumes of cannabinoid-infused consumer products.
Then there are cannabinoid-based drugs.
We live in an era where thanks to the Patent Cliff and exploding drug development costs, the pharmaceutical industry has never been hungrier for new, patentable drugs that can be brought to market. A single drug success can translate into a payday of $100’s of millions, or in some cases, billions of dollars.
Cannabinoid-based drugs represent the single most-promising avenue for pharmaceutical research today. Period.
There are two big reasons why the drug discoveries from cannabis biopharma companies in the years to come will undoubtedly total in the $10’s of billions of dollars (if not much more).
- 100 years of cannabis Prohibition
- Cannabinoid-based drugs are very, very safe
Thanks to a century of politically-motivated cannabis Prohibition, research into cannabis as medicine is 100 years behind other pharmaceutical research. In a trillion-dollar-per-year industry, that’s not merely an opportunity, it’s a mega-opportunity.
Amplifying the commercial potential of cannabinoid-based pharmaceutical products is the remarkable safety/tolerance profile for cannabinoids. Cannabinoids are produced naturally in the human body (known as endocannabinoids). Mothers pass these cannabinoids to infants in mother’s milk.
Value opportunities
Trying to find strong value propositions in the cannabis sector today is roughly as difficult as trying to find sand on a beach. While Stockhouse investors can undoubtedly come up with their own notable candidates, here are a few names that may look particularly attractive to investors in the current investing climate.
Canopy Growth Corp. (TSX: WEED) Down 33% over past 3 months
Putting WEED on a list of attractive cannabis stocks obviously scores zero points for imagination. Canopy Growth is the Big Dog of the Canadian cannabis sector. Many growth-oriented Stockhouse investors avoid large-cap stocks because of the lack of upside potential. But large/sudden troughs in a market can provide investors with rare, attractive windows to enter such companies at a large discount.
Delta 9 Cannabis (TSX: V.NINE) Down 30% over past 3 months
Delta 9 provides investors with several attractive qualities (in addition to value): a strong base of operations (Manitoba), a strategic partnership with WEED, and profitability. NINE is an instant rebuttal for cannabis naysayers who claim there is no economic foundation for the cannabis industry. Many of these cannabis companies will become profitable over time as this new industry emerges. Delta 9 is already profitable today.
Hill Street Beverage Company Inc. (TSX: V.BEER) Down 43% over past 3 months
This is already an established company with a thriving business producing award-winning de-alcoholized beers and wines. This is a growing niche itself because alcohol sales have flattened out as consumers look for healthier alternatives in their social beverages. Now BEER is going to produce cannabis-infused versions of these award-winning beverages and provide much stronger competition for the $1 trillion-per-year alcohol industry. All this for only a $16 million market cap.
Organigram Holdings Inc (TSX: V.OGI) Down 36% over past 3 months
One almost-universal theme in the cannabis sector in recent months is that companies have given back a lot of ground in their share price, over the past year – and especially in the last 3 months. One stark exception to this pattern is OGI.
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Apart from a surge in share price at the end of summer/early fall, this is a one-year chart that says “steady as she goes.” For investors who are feeling shell-shocked by falling share prices and the sudden return of high volatility, this is a company that has been particularly resilient in a volatile industry. Organigram is another cannabis company with a strong base (in this case, Atlantic Canada).
FULL DISCLOSURE: Delta 9 Cannabis Inc. and Hill Street Beverage Company Inc are paid clients of Stockhouse Publishing.