As the market settles into the second half of 2019, INN offers perspective on cannabis stocks to keep an eye on.
After an arduous summer of losses across the board for the cannabis industry, investors are looking ahead at what could be a busy season in the second half of 2019.
The marijuana investment market has seen its fair share of rises and lags as various trends take a hold of the sector and more of the leading companies present concerning financial results.
Here the Investing News Network (INN) offers a look at some of the areas of the marijuana industry investors should be watching closely for stocks to buy for growth in the back half of 2019.
Some experts agree in saying the cannabis investment market is poised to see a turnaround in the second half of the year. INN asked some observers of the industry which marijuana stocks to watch in 2019 as the sector moves past the harsh summer months.
Marijuana stocks to watch in 2019: MSOs and US market seize investor attention
As has been the case so far in 2019, the trend for those looking to invest in marijuana still revolves around the US cannabis market through companies operating below the border but raising capital in Canada.
Thanks to the continued fractured legalization of recreational marijuana in the US — in addition to the evolution of medical programs — several states now offer companies access to eager consumers looking to enjoy the benefits of the cannabis plant.
This area of the investment space has provided a wider growth margin than the Canadian counterparts of the marijuana space. In addition, many experts agree that these US names, mainly multi-state operators (MSOs) of cannabis assets in the fractured US market, are trading at a discount.
Whether some states offer a full recreational program or just a medical marijuana market, these MSOs have been able to pursue thorough expansion plans across the US.
The US market is also waiting on critical developments with key policies that would greatly benefit the marijuana industry in the US.
“I think if we get the STATES Act or SAFE Act moving along … that could be something to really get investors back into the space,” Greg Taylor, chief investment officer with Purpose Investments, told INN.
Matthew Pallotta, an analyst covering marijuana stocks with Echelon Wealth Partners, told INN that he is not sure when exactly the discount for companies in the US marijuana industry will disappear, but that it might fade even before the crucial policy work needed in the US.
“I think the discount is probably going to close regardless, once people start seeing the revenue numbers these businesses are putting up,” Pallotta said.
However, in addition to waiting for these policy changes, the US cannabis industry has faced a new roadblock by way of antitrust reviews from the US Department of Justice.
These investigations have put pressure on the closing of deals between firms such as Cresco Labs (CSE:CL,OTCQX:CRLBF), Harvest Health & Recreation (CSE:HARV,OTCQX:HRVSF) and Curaleaf (CSE:CURA,OTCQX:CURLF).
Taylor expects to see the delays in the marijuana business resolved soon and said once one of these deals clears, the rest will follow.
“I think these mergers will go through, it’s just taking a lot longer than everyone thought and that’s just causing a little bit of uncertainty in the sector but they should come through,” he said.
This year, financial institution Echelon Wealth launched its own coverage of the MSO space, with notes on Columbia Care (NEO:CCHW,OTCQX:CCHWF), Cresco Labs and Green Thumb Industries (GTI) (CSE:GTII,OTCQX:GTBIF).
The research slapped “speculative buy” ratings on Columbia Care and Cresco Labs, while GTI secured a full “buy” recommendation. The analyst issued one-year price ratings for each company — C$11.50, C$15 and C$24, respectively.
The legal marijuana industry in the US has also attracted exchange-traded funds (ETFs) looking to capture the attention of those who want to invest beyond the Canadian leaders. Some Canadian ETFs offer exposure into the burgeoning MSO names catching the attention of investors in the stock market.
Marijuana stocks to watch in 2019: Extraction poised for strong end of year
Investors are set to hear a lot more from cannabis extraction companies this year.
These stocks to buy offer services to cannabis producers for the production of oils infused in edibles or cartridges for vape pens.
Canada is set to legalize edibles and infused products on October 17.
Michael Cammarata, president and CEO of Neptune Wellness Solutions (NASDAQ:NEPT,TSX:NEPT), told INN he thinks the extraction play was not something investors in the marijuana space really considered before.
But, that could change in the second half of 2019.
“As we move into the beverages and edibles in the second half of the year, I think we’re going to be way more focused on extraction, so the extraction play is going to be interesting,” Taylor said.
Executives of the extraction space agree with Taylor since these companies have seen an uptick in interest from the investment market.
“I’ve been kind of banging this extraction drum for four years. We see the markets moving towards that. That is where a lot of the money is going now, so extraction is really that next play,” Rosy Mondin, CEO of World Class Extractions (CSE:PUMP), previously said.
Everett Knight, executive vice president of strategy and investments with Valens GroWorks (TSXV:VGW,OTCQB:VGWCF), previously told INN the legalization of edibles represents the start of the race for these companies.
According to a report from Deloitte, the Canadian edible and infused cannabis market will be worth over C$2.7 billion per year.
“You can’t have edibles and concentrates without extraction, and you can’t have high quality product development and products on the market without high quality extraction,” Knight told INN.
Marijuana stocks to watch in 2019: What about the Canadian market?
While Canadian cannabis stakeholders are excited to welcome the legalization of recreational edibles and infused products, marijuana producers will not see the results from this event until nearly the end of the year.
In a previous interview with INN, Charles Taerk, president and CEO of Faircourt Asset Management, said the biggest challenge facing Canadian producers are the rules on legalization and the late sales start.
Taerk told a room of investors they should be ready to see lower numbers since the effects of edible sales “won’t really be felt until another quarter or two.”
This is because the actual sales of these cannabis products won’t officially begin alongside legalization.
“It is expected that a limited selection of products will appear gradually in physical or online stores, and no earlier than mid-December 2019,” Health Canada said when it unveiled its guidelines for the sales of these products.
Recreational marijuana sales have flourished the revenue available across the country, but cannabis companies have still posted difficult financials for investors as the sector continues to grow in size.
When asked if investors would be better off moving their attention to the US altogether, Taylor said there is still a lot of opportunity in the legal cannabis market in Canada with companies such as Organigram Holdings (NASDAQ:OGI,TSXV:OGI), Canopy Growth (NYSE:CGC,TSX:WEED), Aurora Cannabis (NYSE:ACB,TSX:ACB) and HEXO (NYSEAMERICAN:HEXO,TSX:HEXO).
“I don’t think that you need to completely abandon Canada but I certainly think that people should be looking at multiple geographies,” he said about investing options. Taylor also acts as one of the portfolio managers of the Purpose Marijuana Opportunities Fund (NEO:MJJ).
These companies have enjoyed the benefits of marijuana legalization for recreational use in Canada but some of these marijuana growers have still posted negative results.
Pallotta also agrees that the Canadian marijuana companies will not see a fade in investment interest. He said this is purely due to the support being thrown from institutional money that is looking for cannabis stocks to invest in but that are unable to secure it in the US space.
“A lot of institutions are not quite there yet in terms of being able to invest in US names just because of the federal legality,” the analyst told INN.
In his view, Pallotta points to the scarcity of retail stores as the biggest issue holding back the Canadian market and the revenue seen by investors.
Marijuana stocks to watch in 2019: Investor takeaway
Investing in marijuana stocks has offered a volatile ride full of growth and stocks to buy alongside bumpy lags in the sector.
Investors are looking to recover from a difficult summer for the cannabis industry with the potential from critical events coming up later this year in the US and Canadian cannabis markets.
The stock market may see a heated end of the year as many securities in the legalized cannabis market angle for an increased market share.
Don’t forget to follow us @INN_Cannabis for real-time news updates!
Securities Disclosure: I, Bryan Mc Govern, hold no direct investment interest in any company mentioned in this article.
Editorial Disclosure: World Class Extractions and Valens GroWorks are clients of the Investing News Network. This article is not paid-for content.
The Investing News Network does not guarantee the accuracy or thoroughness of the information reported in the interviews it conducts. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence.