With last year’s pot stock price pump dwindling, and Wall Street entering its second market correction, investor faith in the marijuana stock market has begun to languish. The early promise of California’s adult-use recreational market gave way to defensive trading as cannabis stocks fell victim to analyst suggestions of “speculative buys” and slow but steady rumblings of a pot stock bubble. By the end of quarter one, the weed stock market was in full-blown panic mode, analogous to the not-so-distant bitcoin frenzy that wreaked havoc on many an unskilled trader.
Current Valuations Damned The Market
The run-up in marijuana stock prices late last year had everyone with a savings account and a copy of the Wall Street Journal looking to invest in cannabis. But, as Barron’s recently pointed out, current valuations of Canada’s big four make joining the party a hard sell these days. According to an article published this week in the once and forever market magazine, Canada’s cannabis market is valued at near $30 billion. Put in perspective, that is half the market capitalization of the country’s gold mining industry.
Canopy Growth Corp. (TSX:WEED), Aurora Cannabis Inc. (TSX:ACB), Aphria Inc. (TSX:APH), and MedReleaf (TSX:LEAF) all call Canada home. Collectively, these big four lay claim to $9 billion in market capitalization. According to Barron’s, that is larger than the entirety of Canada’s recreational market.
“If Canada’s retail market can reach $9 billion in annual sales in a few years—as one bull estimates it will—that would yield only a couple of billion dollars in cash flow to wholesale producers like Canopy,” states that Barron’s article. “So today’s investors are effectively paying 15 times the industry’s cash flow five years from now, a generous multiple. Moreover, there’s reason to believe these revenue forecasts are overly optimistic.”
Furthermore, more pot stock investors are beginning to have a clearer picture of what a recreational market will look like, with the examples of Colorado and Washington State already in the books. If, as is said, past is prologue, marijuana stock investors can expect prices to fall precipitously. According to Barron’s prices have fallen almost ten percent in each of the last two years in both states. It should come as no surprise that the cannabis market has begun to correct.
Death By A Thousand Cuts
Of course, the current predicament that weed stocks find themselves in now is due to more than just price runs in the Canadian market or even Jeff Sessions rollback of the “Cole memo” protections. In fact, pinpointing one specific reason as to the current cannabis stock downturn is a fool’s game. Wall Street itself is in tatters as fears of a global trade war and the end of the nine-year bull market sends investors into a global panic.
Still, marijuana stock investors not taken in by shiny things and the fear of missing out would do well to continue playing the long-term game. Canada, for all of its faults, will legalize cannabis for recreational purposes this year. The United States will have to realize, sooner rather than later that a house divided cannot stand; state legalization is spreading and everything is boiling to a head at the federal level.
Moreover, the current correction will last only as long as the market necessitates. With that in mind, these five marijuana stocks are best buys in a down market:
GW Pharmaceuticals Plc
A pure-play medical marijuana stock pick that trades on the NASDAQ, GW Pharmaceuticals Plc (NASDAQ:GWPH) is at the forefront of cannabinoid-based research in the field of epilepsy and seizures. This past March saw the U.S. Patent & Trademark Office grant five new patents to their flagship drug Epidiolex, which, if approved by the FDA, would give the company rights to the drug until 2035. Already GW has orphan status for the drug, making them one of the safest, pure-play medical cannabis stock picks in an otherwise down market.
Kush Bottles Inc.
One of the most solid plays in the ancillary weed stock market, Kush Bottles Inc. (OTCMKTS:KSHB) deals in packaging products and solutions, including pop-top bottles and child-resistant packaging for farmers, growers, and both medical and recreational cannabis dispensaries. As states like California enforce strict regulatory rules concerning packaging, Kush Bottles is perfectly positioned to tackle the market in a smart, hands-off way that can avoid most of the pitfalls of daily market volatility. It is a weed stock buy that will weather the storm handily over the next few months.
Novus Acquisition and Development, Corp.
As markets tighten and recreational cannabis stocks struggle to stay consistently profitable, investors are wise to keep an eye on the medical marijuana stock market. Novus Acquisition and Development, Corp. (OTCPINK:NDEV) the nation's first carrier to offer a cannabis health plan, is a prime example of a company that can weather any downturn. They offer a needed product in a rising sector of the industry, and with a quarterly revenue increase of 55 percent, and a year-to-year increase of 66 percent, Novus looks to have a robust business model to solidify long-term growth.
CannaRoyalty Corp. (CSE:CRZ) (OTCQX:CNNRF) is one the most diversified pot stocks on the market today, with numerous holdings across the United States and Canada. The company’s focus on the California market is a smart move from a variety of perspectives, as the West Coast state is a broader market than the whole of Canada. Recent acquisitions of River Corp. and Kaya and Alta Supply show the company’s dealmaking strength and make this weed stock pick a top buy in an otherwise down market. Trading at just under $4.00 per share, CannaRoyalty has already weathered the storm better than most.
Scotts Miracle-Gro Company
The Scotts Miracle-Gro Co. (NYSE:SMG) is a global leader in lawn and garden materials who recently became a top-rated marijuana stock pick. They have a 75 percent stake in hydroponics equipment company Gavita International, a sector set to grow to $24 billion this year alone. With revenues were upwards of $250 million per year from hydroponics, Scott’s currently trades at around $85 per share. Most notably, they also pay a 2.16 percent dividend yield and have grown their dividend for the past seven years consistently. This left-field marijuana stock buy may be the safest bet yet during the pot stock downturn.