The Year of Opportunity: Marijuana Stocks to Watch in 2020

The Year of Opportunity: Marijuana Stocks to Watch in 2020
The Year of Opportunity: Marijuana Stocks to Watch in 2020

In 2019, marijuana stocks fell long and they fell hard. By any metrics, the selloff this year was grossly excessive. Valuations now sit at greater-than-two-year lows.

Thanks to the travesty of cannabis Prohibition, the world’s most commercially versatile soft commodity is an emerging industry. For Contrarian value investors, this year’s meltdown in marijuana stocks is next year’s opportunity.



In 2019, many cannabis companies carved out robust markets for themselves. But their stock went down, not up. Opportunity.

Many cannabis companies generated strong revenue growth, but their stock went down, not up. Opportunity.

In 2019, even the cannabis companies that transitioned to profitability saw their stock go down, not up. Opportunity.

Profiting in markets is about mispriced assets. In The Seed Investor’s 2019 Cannabis Review, we identified the downward drivers in the cannabis industry and explained how and why a selloff turned into a meltdown. We also pointed to the positive developments in the cannabis industry in 2019.
 
  • Major talent infusion at the management level. Numerous food and beverage industry management veterans embraced the emerging cannabis industry.
  • Cannabis 2.0 arrives in Canada. A wide array of new products, with higher margins, generating an estimated 3 million new consumers. This has already created a need for large-scale cannabis extraction.
  • Major League Baseball removes cannabis as a “banned substance”. MLB reverses itself. Cannabis use is permitted, but players will now be tested for opiates. Other professional sports leagues are expected to follow.
  • Canadian breakthrough in outdoor cultivation. Aleafia Health (CAN:ALEF / US:ALEAF) produced its first outdoor harvest at a cash cost of CAD$0.08 per gram. A potential game-changer in making Canada’s legal industry price competitive with the cannabis black market.
  • Huge capital infusion for the cannabis industry. U.S. industry leader Curaleaf Holdings (CAN:CURA / US:CURLF) just received US$275 million in non-dilutive debt financing. More big debt financings are expected imminently in the cannabis space.

None of the achievements for individual cannabis companies have been factored into their share price. None of the overall positive developments for the cannabis industry have been priced into marijuana stocks.

As we move into 2020, we see the U.S. cannabis industry as being a story about a select number of industry leaders. In Canada, steady growth in cannabis sales, a critical mass of cannabis stores, and the estimated 50% increase in cannabis consumers from Cannabis 2.0 could translate into a much broader rally.

The Seed Investor is focusing on several major investment themes in 2020.

Revenge Of The Value Investor: Short Squeeze

In 2019, several companies transitioned to profitability. Many more are approaching profitability. A huge infusion of non-dilutive capital for the cannabis industry has just arrived.

In the U.S., industry leaders are separating themselves from the pack. The “vaping crisis” is now abating.

In Canada, Cannabis 2.0 arrives even as delays in cannabis store licensing start to diminish. Steady growth in cannabis sales is about to be turbocharged by Phase 2 of legalization.

Powerful positive cannabis industry drivers coupled with ultra-low valuations for marijuana stocks can be expected to attract a huge influx of value investors. Meanwhile, short positions in marijuana stocks are grossly excessive and extremely exposed. This creates the conditions for a classic short squeeze.



Marijuana stocks best positioned for a short squeeze in 2020 include:

Curaleaf Holdings (CAN:CURA / US:CURLF)
CURLF (US$5.39) has a short position of 1,628,950, equating to 4.2 days to cover. Curaleaf is approaching profitability and just received $275 million in non-dilutive debt financing. Currently the world’s largest cannabis company by revenues.

Canopy Growth (US:CGC / CAN:WEED)
CGC (US$19.30) had a total volume of 3.2 million shares on December 24, 2019, with a huge short volume ratio of 29.64. But here the shorts are already in retreat. Canopy is up more than 50% from its November low following a “buy” recommendation from Bank of America Merrill Lynch. Canada’s cannabis industry leader is well positioned for Cannabis 2.0.

GW Pharmaceuticals Plc (US:GWPH)
GWPH (US$102.80) has a massive short position of 5.7 million shares, equating to 7.4 days to cover. The world’s cannabis biopharma leader has already brought a licensed and approved drug to market (Epidiolex) for the treatment of epilepsy, a market expected to reach $5.47 billion by 2024. GW Pharma’s revenue rose to $91 million last quarter.

Aphria Inc (US:APHA / CAN:APHA)
Major Canadian LP Aphria (US$4.86) also has a gigantic U.S. short position (33.7 million shares), translating into 6.6 days to cover. This is despite the fact that APHA has already produced back-to-back profitable quarters and is forecasting positive EPS when it reports its upcoming earnings.

U.S. Election Year Spells Regulatory Paralysis, Leaders Separate From The Pack

This year ranked as an overall regulatory failure in the U.S. despite Illinois and Michigan coming online (late in the year) as new legal markets for adult-use cannabis.

California’s state government continues to torpedo its legal cannabis industry. The much-hyped (and badly needed) SAFE cannabis banking bill now appears to be stalled in the Republican-controlled Senate. The FDA continues to betray American consumers and the legal cannabis industry by dragging its heels on CBD regulations.

As the U.S. moves into a presidential election year, 2020 is unlikely to be any better. In 2019, a handful of U.S.-based industry leaders began to separate themselves from their U.S. peers. We expect this trend to continue in 2020.

U.S.-based companies best positioned to outperform include:
 
Curaleaf Holdings (CAN:CURA/ US:CURLF)
A fresh injection of $275 million of non-dilutive capital, in a U.S. market where virtually every company is trading at pennies on the dollar. Can you say: “kid in a candy store”? Curaleaf is now fully backstopped to complete its own transition to profitability while still having plenty of cash to scoop up cheap acquisitions.

Trulieve Cannabis (CAN:TRUL / US:TCNNF)
Trulieve dominates Florida’s robust medicinal cannabis market. It’s also branching out into other U.S. states and is showing similar signs of strong execution in Massachusetts’ fully legal cannabis market. TRUL was one of the best-performing cannabis stocks in the second half of 2019. With full cannabis legalization expected to be on the Florida ballot for 2020, plenty of blue sky potential here.

iAnthus Capital Holdings (CAN:IAN / US:ITHUF)
Another leading U.S. MSO, iAnthus isn’t as large as Curaleaf but is arguably much cheaper. IAN just closed on another US$36 million tranche of its financing with Gotham Green Partners. Well positioned across many of the U.S.’s strongest cannabis markets, the company could easily reverse its 2019 stock performance.

Planet 13 Holdings (CAN:PLTH / US:PLNHF)
Planet 13 is a specialty cannabis retailer with a simple goal: being the industry-leading retailer in the U.S.’s premier urban cannabis markets. PLTH started with global tourist hub, Las Vegas, where it operates the world’s largest cannabis store. The company is entering other major U.S. markets. Just named the industry leader in cannabis retail at the recently concluded MJBiz Conference.

Canadian Cannabis Poised For A Retail Explosion

The first year of full cannabis legalization in Canada was a disappointment. However, it was far from being the write-off portrayed by the cannabis-hating mainstream media.

Overall cannabis revenues for the legal industry roughly tripled in 2019. More than 700 cannabis stores have now been opened in Canada. This was led by the province of Alberta which generated nearly half of these store-openings.

The biggest disappointment for Canadian cannabis retail in 2019 (the province of Ontario) is conversely the biggest potential opportunity in 2020. With only 25 stores for a population of 14.5 million today, Ontario could see as much as a ten-fold increase in cannabis stores licenses in 2020, under a new regulatory framework.

Meanwhile, Phase 2 of cannabis legalization – Cannabis 2.0 – has already created a huge need for large-scale cannabis extraction. This produced some of the cannabis industry’s biggest winners in 2019. Now all these next-generation cannabis products are hitting store shelves.



Canada’s legal cannabis industry is positioned to produce the majority of winners among marijuana stocks in 2020. Companies set up for a strong year in 2020 include:
 
The Valens Company (CAN:VLNS / US:VLNCF)
One of the best-performing marijuana stocks in 2019, Valens made an early decision to become an industry leader in cannabis extraction. Now Valens is using its profitable, large-scale extraction operations as a foundation to move into the production of value-added (and extraction-based) cannabis products.

MediPharm Labs (CAN:LABS / US:MEDIF)
Another top-performer in 2019, MediPharm is Canada’s current cannabis extraction leader – and also profitable. In the case of LABS, the company is focusing on international expansion and is already carving out a significant presence in Australia’s emerging cannabis market. MediPharm has a pending application for a NASDAQ listing.

Meta Growth (CAN:META / US:NACNF)
Canada’s current leader in cannabis retail, META’s stock is finishing 2019 on a strong note after a difficult year. Since bottoming on November 18th at a 52-week low of CAD$0.155, the stock has risen by 133% and is presently trading at CAD$0.36. Meta Growth continues building on its strong Alberta foundation and just announced a new cannabis store in Toronto’s grossly under-served cannabis market.

Fire & Flower Holdings (CAN:FAF / US:FFLWF)
Also a leader in cannabis retailing, Fire & Flower has been efficiently building its own Canadian retail network. This has attracted a substantial strategic investment from grocery and convenience store giant, Alimentation Couche-Tard (CAN:ATD.A / US:ANCTF), owner of the Circle-K convenience stores. Couche-Tard is positioned to acquire majority control, which could see it injecting as much as CAD$380 million in growth capital.

Choom Holdings (CAN:CHOO / US:CHOOF)
Another Canadian cannabis retailing powerhouse, Choom also has a strong retail foundation in Alberta. Already with a retail foothold in the key Ontario market, Choom recently announced plans to open two new locations in Vancouver’s extremely under-served cannabis market. The company bolstered its management team with new CEO, Corey Gillon, who boasts senior management experience with both Walmart and Aritzia.

Aphria Inc (US:APHA / CAN:APHA)
The first major cannabis company to make the transition to profitability, Aphria is now forecasting positive EPS in this quarter. It recently doubled its cultivation capacity with the licensing of Aphria Diamond. Along with its strong Canadian presence, Aphria has also invested considerable energy in positioning itself for international expansion.

If surging cannabis sales stimulate a broader rally, investors should also keep an eye on some other smaller Canadian cannabis companies with strong balance sheets. Companies like Aleafia Health (CAN:ALEF / US:ALEAF) and Delta 9 Cannabis (CAN:NINE / US:VRNDF) could surprise to the upside in 2020.

International Cannabis Markets Begin To Materialize


If bullish sentiment returns to marijuana stocks, expect investor interest in international cannabis operations to quickly surge. In 2020, international cannabis markets will cease to be a story purely about potential as actual revenues are now on the table.

Germany, Australia, and Colombia all have emerging domestic cannabis markets. Israel has legalized cannabis exports. Brazil just legalized medicinal cannabis but continues to ban cultivation. This is a consumer base and potential export market as large (in terms of population) as the legal cannabis market in the United States today.

Major Canadian LP’s like Canopy Growth (US:CGC / CAN:WEED), Aphria Inc (US:APHA / CAN:APHA) and Aurora Cannabis (US:ACB / CAN:ACB) already have their sights on international markets. Latin America-based Khiron Life Sciences (CAN:KHRN / US:KHRNF) and Isracann Biosciences (CAN:IPOT / US:ISCNF) are also positioned for international growth.

As fast as cannabis company valuations have fallen, history already shows that these stocks can rise much faster. After a disappointing (and irrational) meltdown in 2019, marijuana stocks are poised for a much different year in 2020.

The Year of Opportunity.



DISCLOSURE: The writer holds shares in Curaleaf Holdings, The Valens Company, MediPharm Labs, Meta Growth, and Choom Holdings. Choom Holdings is a client of The Seed Investor.
 
Tags
Choom, Marijuana Investing