As opposed, if you invested in the cannabis industry over the past couple of years, there’s a good chance that you are making some money, since many cannabis stocks have grown in price over the last 3 years. The bottom line is, “timing is crucial”. And by the way, back to the Microsoft example, it’s good to know that if your mom or grandpa had invested one month’s wage in a tech company back in the ‘70s and sold their stocks in 2000, you probably wouldn’t need to work today. This is the power of being early birds in emerging markets.
Many cannabis enthusiasts, or simply money enthusiasts, are throwing their bucks at cannabis stocks, fearing missing out on big gains. But most of these people do not have investing experience, or have taken the time to research each company’s financial and business information. Going over data and corporate documents is not easy, and most people don’t have complete access to this information. As a result, the average private investor places their bet on something they don’t know. This is not necessarily bad—just be aware of it.
THE GREEN RUSH
There are a number of services and product providers coming from outside the cannabis industry that have gotten on board since legalization gained traction. Most of these companies are considered hybrid plays since their business is not strictly focussed on the cannabis industry. But they would benefit a lot from strong growth in this sector. Plant nutrition, pest control, facility management, lighting systems, and hydroponics are some of these ancillary services and products.
Several pharma and biotech companies have started to work with natural and synthetic cannabinoids, resulting in fully developed products or candidates undergoing clinical trials. Here is a short selection of pharma companies that are fully involved in the development of drugs targeting the endocannabinoid system.
The cannabis industry is very young. Early birds can have difficulty understanding the various business models, and financial information provided by businesses is not always straightforward and transparent. Cannabis stock prices are subject to huge fluctuations due to general market sentiment and the dynamics of worldwide cannabis reform. Furthermore, none of these cannabis companies are making profits right now, thus their stock price relies exclusively on forecasted earnings in a highly competitive market that has just started to be regulated.
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What I see in KushCo is a company that’s at the center of three niche trends. It’s a key player in the packaging and branding solutions space, with more than 5,000 growers in 25 countries as clients. KushCo ensures that its clients remain compliant with federal, state, and local laws, and should see a steady uptick in demand as legalizations continue around the world.
But the second quarter has been sort of a buzzkill for marijuana stock investors. The aforementioned Horizons Marijuana Life Sciences ETF has declined more than 14% in the second quarter, with a whopping 35 cannabis stocks losing a double-digit percentage in May.
With its newfound capital, CannTrust is planning to acquire up to 200 acres of land, and utilize this land for outdoor growing purposes. This cash will also aid in the phase 3 expansion of its flagship Niagara campus, which focuses on hydroponic growing methods. Most of this outdoor crop, which should total 100,000 to 200,000 kilos a year, will be used for extraction purposes to create high-margin derivative products, such as edibles, infused beverages, concentrates, or vapes. A full gamut of derivative options will get the green light from Health Canada by no later than mid-October, paving the way for CannTrust to substantially boost its margins.
Third and finally, the company provides hydrocarbon gases and solvents used in the respective manufacture of cannabis oils and concentrates. Not to sound like a broken record, but the expected surge in derivative sales later this year places KushCo in the right place at the right time.
To be sure, Trulieve does have its negatives. For example, a number of new players are set to enter its home market in Florida, including MedMen Enterprises. It’s also possible that Trulieve’s margins could decline as it aims to make a name for itself in markets outside of Florida, such as California, Connecticut, and Massachusetts. However, none of these concerns appears crippling to Trulieve’s bottom line, and that’s all that really matters.
The first quarter probably couldn’t have been any better, with the Horizons Marijuana Life Sciences ETF, which holds more than four dozen pot stocks of various weightings, gaining over 50%. We also witnessed 14 popular pot stocks rise by more than 70% during the first quarter.
While these are, indeed, bad-news events, nothing is particularly worrisome about any of these adverse events. The accounting error had no impact on revenue, cash on hand, or cash flows, so simple governance changes will resolve the issue. Likewise, lower gross margin was primarily the result of tariffs being implemented on its Chinese-based vape product imports. With the company now passing along these higher costs to consumers, rather than KushCo eating this higher cost, margins will improve.