What Ever Happened to Pot Stocks?

Pigs meet troughs...

Written by Jimmy Mengel
Posted February 20, 2020

In less than a year, pot stocks went from the "Belle of the Ball" to a "Pig with Lipstick".

That is to say that it's been a rough go for us cannabis investors. Last year was a forest fire. But, it was crucial to recalibrate a runaway industry. I believe the best is yet to come...

If you've been paying attention, you've seen this play out in real-time.

Speaking of pigs and troughs, let's take a look at this chart. It pretty much sums it up:


stock expectations

We are at the plateau but will begin ascending again starting this year.  

Buying marijuana stocks can be extremely lucrative. In the six-plus years I’ve been investing in the pot stock market, I’ve had more triple-baggers than the rest of my investing career combined.

But if you don’t know what you’re doing, it’s easy to get burned. I’ve seen dozens of stocks go down in flames. These were typically pump-and-dump schemes that never had a chance at a legitimate business, but the stock had marijuana somewhere in the name and went through the roof — despite not having any operations or experience to speak of.

When I started in the sector, I saw a lot of marijuana companies that evolved out of shell corporations that basically had no experience in the industry. One I point to sometimes was called Integrated Parking Solutions, and then overnight it became Integrated Cannabis Solutions, and the stock went up like crazy.

It soon crashed and is now worth exactly nothing.

That is to say, you need to be careful.

This is going to be a fluctuating market. What often happens is that there'll be good or bad news out one day and all of the marijuana stocks go crazy for a week or two. It happened when Canada introduced legalization.

It happened when California went legal.

Stocks went through the roof…

On the other hand, last year, pot stocks got absolutely creamed.

After watching the market grow exponentially for over four years, I watched in horror as the entire industry imploded quickly over the last few months of the year.

It was like a wildfire...

Wildfires are one of the most terrifying and unpredictable natural events that happen. When they break out, it’s like hell has descended on Earth. All it takes is an ignition point — a campfire, a flicked cigarette, a downed power line — to start it.

Once it starts, it’s incredibly difficult to stop.

While here in the States we typically associate wildfires with California, the cannabis investing wildfire started in Canada.

The ignition point was Canopy Growth’s financial results. The biggest cannabis company in the world posted a billion-dollar loss. The wind picked up from there in the form of panicked investors dumping shares. That fanned the flames and kept the fires burning with greater intensity throughout the year.

The losses mounted and acted as tinder, which — like burning embers — left us deep in the red at the end of 2019.

But, like green shoots rising from the ashes, the cannabis industry will grow again this year…

The soil is fertile, the farmers are resilient, and the demand for crops has never been stronger…

The cannabis world continues to change... and grow.

The North American cannabis industry is on its way from $9.2 billion today to a massive $47.3 billion in the years ahead.

Here are my predictions…

The U.S. will continue to expand the market. The U.S. is 10 times the market that Canada is.

But right now only 11 states — plus Washington, D.C. — currently have recreational use, while 24 more allow some form of medical marijuana.

Illinois just went legal and is expected to become a $2.5-billion-a-year industry.

We’re going to see full-scale legalization in the U.S. soon, thanks to legislation like House Bill 3884: The Marijuana Opportunity, Reinvestment, and Expungement (MORE) Act and the Secure and Fair Enforcement (SAFE) Banking Act.

These bills will remove the marijuana plant from the federal Controlled Substances Act and protect banks that service state-legal marijuana businesses from being penalized by federal regulators.

The next reason that cannabis stocks should rise from the ashes, is that our neighbor to the north should finally start getting its act together...

Cannabis 2.0 has already begun. At the end of last year, they unveiled final regulations to enable the sale of cannabis edibles, extracts, and topicals, which will unlock what is forecast to be a multibillion-dollar industry.

They will also be expanding distribution and retail operations.

For example, Ontario will soon allow far more retail stores, with some projections adding 40 or so new stores a month, starting in January. Once that bottleneck is loosened, Canadian companies will finally be able to unload the massive supplies that have been literally and figuratively weighing them down.

Now that much of the forest has been burned, only the strongest will survive.

Essentially, if you follow marijuana stocks you better have a good constitution, because it has been up and it's been down. It's been a wild ride, but we’ve always come out way on top.

There are hundreds of marijuana stocks to choose from, but only a select few that I would feel comfortable holding over the long term.

Here are some quick words of wisdom based on my experience in the sector.

Size and Scope

As more and more areas open themselves up to both medical and recreational marijuana, there are more and more companies flooding the market with “flower” — the smokable part of the marijuana plant.

That is going to drive down prices and create very difficult margins for smaller producers.

Here’s what I look for... size and scope. But it must be targeted. Companies like Canopy and Aurora tried to go too big and too bold. They have paid the price with billion-dollar losses. 

Aphria Inc., on the other hand, is positioning itself as a low-cost producer with international reach.

It uses greenhouses to keep energy costs down.

It currently has a licensed capacity of 9,000 kg per year. With its expansion projects underway, Aphria is expected to reach 1 million square feet and 100,000 kg annual production capacity by early this year.

Oh, and it has actually shown a profit over the last two quarters.

Companies like this are the ones that will control the production market. For producers, it’s go big or go home...

Unique Products

Some companies are well-positioned because of the unique products they offer. While I wouldn’t recommend smaller growers that are bound to be wiped out, I do recommend companies with strong branding, a patented product, or a strong advantage in the area they are operating.

Go with companies that have robust branding and a high-grade product.

Financial Support

It is very difficult to raise capital in an industry like marijuana.

It sounds crazy at this point, considering that legal marijuana could become a $22 billion market this year.

But the truth is, big banks still won’t touch it. If you are trying to grow a business you won’t have the luxury of Bank of America or Goldman Sachs throwing money at you.

If you want to expand your operations — like breaking ground on a new processing facility — it takes a lot of money. Unless a company has an owner with very deep pockets, or a valuable Rolodex of investor friends to call, it can be very, very difficult to come up with capital.

You need major capital and there are several companies that help provide it.

Location

Many states have strict limitations on how many licenses are awarded for marijuana growers, producers, and dispensaries.

Florida’s demographics are ripe for medical marijuana. It has a very old population with a litany of health issues that medical marijuana seeks to treat. Some estimates have put the Florida medical marijuana market to be upwards of $1.6 billion.

That currently represents approximately 14% of the U.S. medical cannabis market.

Here are the stats:

  • Population: 20,600,000
  • Market: $1.6 billion
  • Qualifying Patients: 6,065,927
  • No. of Licenses: 11
  • Dispensaries: 25 dispensaries / license

Canada has approximately 800,000 people per license in comparison to Florida, which has 3 million people per license.

As they say in real estate: location, location, location.

Illinois, Oklahoma, and New Jersey are other spaces to look towards. The European market is only getting started. There is so much virgin land out there that new markets will start springing up every day.

You just have to have your telescope trained on the uncharted horizons.

The Team

This is the first thing you should look at when evaluating a new marijuana company. I’ve seen some marijuana companies that had teams made up entirely of ex-mining executives, capital market guys, and lawyers.

I would seriously consider investing in companies with people who have experience in the field in key management positions.

The same goes for the quality of the material: who is responsible for producing the product?

If it’s a medical marijuana company, is there an expert who has handled CBD medications, conducted clinical trials, or worked with marijuana at all?

Take a good look at the company’s website and make sure it has a solid track record.

Responsiveness

How often does the company put out news? Is it regularly putting out press releases to keep investors abreast of its progress?

Is it on the road promoting the stock through conferences and interviews?

Does it have a decent looking website with complete information?

Does its Investor Relations manager get back to you when you ask a question (this is an important thing to do. If it does not have an IR liaison that you can speak with or e-mail, I treat that as a red flag. It should WANT to talk about the company as much as possible.)

These are all signs of a good company.

Closing

The cannabis sector is only just getting started. I’ll bring you market analysis — including boots-on-the-ground interviews with the major and minor players.

And while you may have missed out on the first “Green Rush”, there is so much more to come.

As they say, the best time to plant a tree was yesterday.

The next best time is today…

Godspeed,
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Jimmy Mengel

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Jimmy is a managing editor for Outsider Club and the investment director of several personal finance advisories, The Crow's Nest, and The Adventure Capitalist For more on Jimmy, check out his editor's page.

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