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All Contents © 2019The Kiplinger Washington Editors
By Ryan Ermey, Associate Editor
| February 8, 2018
The Green Rush may be upon us. Cannabis investment research firm ArcView estimates that legal North American marijuana sales hit more than $8 billion in 2017, up 22% from the year before. What’s more, the firm expects annual sales to grow by 27% per year through the end of 2021, reaching $22.6 billion at that point. Investors have begun speculating accordingly – the ETFMG Alternative Harvest ETF (MJX), an exchange-traded fund that invests in marijuana stocks, has returned 14% since mid-December.
Driving much of the speculation: our neighbors to the north. Canada, where medical marijuana is already legal, is expected to legalize and regulate pot for recreational use by July. The market for legal pot is growing stateside as well. Twenty-nine states and the District of Columbia have legalized marijuana for medical purposes, and nine states and D.C. allow recreational marijuana use.
However, pot still is illegal under federal laws, and the Justice Department has said it plans to crack down on users of the drug. This legal gray area has made dealing with U.S. cannabis growers and distributors a dicey proposition for financial institutions and investors alike. For now, the most-promising weed stocks in the U.S. are pharmaceutical companies exploring the viability of cannabis as a treatment for several disorders.
Marijuana stocks of any stripe are risky. Many Canadian pot distributors have no earnings to speak of, and share prices measured in relation to sales are at nosebleed levels. Marijuana’s use in medicine still is in its nascent stages. And, like internet and computing companies of old, it’s difficult to know which outfits will have staying power amid shifting regulations and unpredictable consumer demand.
But make no mistake: Demand for legal cannabis is rising, and the growth prospects for firms that can meet it are tantalizing. Risk-tolerant investors who want to go green can consider these stocks.
Data is as of Feb. 7, 2018. Companies are listed in alphabetical order. Currency is U.S. dollars, unless otherwise noted. Click on ticker-symbol links in each slide for current share prices and more.
Market value: $2.1 billion
52-week range: $3.40-$19.87
The stock of Canadian pot grower and distributor Aphria (APHQF, $12.82) illustrates how volatile this corner of the market can be. Shares have fallen 32% since hitting an all-time high in early January. Even so, at $12.82, the stock (which is listed on the Toronto Stock Exchange and trades over-the-counter in the U.S.) has shot up more than 150% since October. As is the case with many Canadian cannabis companies, investors are betting on a rapid expansion in Aphria’s business, and the company’s recent moves suggest that executives are aiming to accomplish that by buying other players in the field.
In early January, the firm acquired fellow grower Broken Coast Cannabis for $187 million. Analysts at Canadian investment bank Canaccord Genuity say the acquisition should provide a moderate boost to Aphria’s domestic sales, which they expect to represent 16% of total Canadian marijuana sales by 2020.
In late January, Aphria agreed to buy Nuuvera for $670 million in cash and stock. The deal makes Alphria a “global leader” in the cannabis market, executives say, with Nuuvera bringing with it one of only seven licenses to distribute medical marijuana in Italy, and a distribution deal in Germany – a market Canaccord expects to represent sales of more than 300,000 kilograms of medical marijuana by 2027, up from an estimated 2,000 kilos in 2018. Canaccord projects Aphria to increase earnings to 74 Canadian cents per share in 2020 (roughly 60 cents U.S. at current exchange rates), up from 3 cents (2 cents U.S.) in 2017.
Market value: $4.1 billion
52-week range: $4.90-$35.88
Canopy Growth (TWMJF, $22.00) has no earnings and trades at nearly 100 times sales, so it doesn’t look cheap by traditional measures. But if Canopy can maintain its market-leading position, buying the stock (which trades over-the-counter in the U.S.) now could feel like buying into Anheuser-Busch in 1933.
Canopy is Canada’s biggest cannabis outfit, leading the sector in revenues and marijuana sold by weight. The stock’s market capitalization (share price times shares outstanding) is $4.1 billion, the largest among its peers.
The company is expanding into the recreational market, too. Canopy has leased a 700,000-square-foot greenhouse (formerly used for organic tomatoes) in Quebec that will begin producing cannabis in May, and it now operates in eight provinces, having recently inked distribution agreements with local governments in Newfoundland and Labrador and Prince Edward Island. The company also has announced plans for a 40,000-square-meter facility in Denmark that will begin cultivating pot by spring 2019. Canaccord analysts expect Canopy to eventually export marijuana from this facility to other weed-legal countries in the European Union.
All told, Canaccord projects Canopy to ramp cannabis sales to nearly 91 million kilograms per year in 2020, up from just 5 million this year, resulting in annualized revenue growth of more than 100% over that period.
Market value: $41.7 billion
52-week range: $147.92-$229.50
In October, Constellation Brands (STZ, $213.63) announced plans to purchase a 9.9% stake in Canopy Growth for $191 million. The deal represents the first foray into the marijuana business by a major American alcohol company.
Constellation, known for popular alcohol brands such as Corona beer, Black Box wine and Svedka vodka, plans to market and sell cannabis-infused beverages. The company doesn’t intend to sell them in the U.S. until marijuana products are legal nationwide, says CEO Robert Sands, but Constellation may explore selling them in Canada or other markets where the drug is recreationally legal in the nearer future.
Investors waiting for the marijuana trend to contribute to Constellation’s bottom line can, in the meantime, cash in on favorable trends in the company’s beer, wine and spirits business. The firm, which imports and markets beers such as Corona, Pacifico and Modelo, should benefit from an expanding population of Hispanic customers, who spend nearly one-third of their beer dollars on Mexican imports, says Morningstar analyst Sonia Vora. Another boon for the company, she says: a growing cohort of millennial drinkers, who account for the largest portion of U.S. wine sales, and who should bolster demand for Constellation’s wine offerings, such as the Rex Goliath label.
Joseph Agnese, an analyst at investment research firm CFRA, sees the company boosting earnings per share by 12% in the fiscal year that ends in February 2019. He rates the stock a “Strong Buy.”
Market value: $3.4 billion
52-week range: $92.65-$143.37
Investing in marijuana-focused biotechnology stocks is similar to investing in traditional biotech stocks, says Harrison Phillips, vice president at Viridian Capital Advisors, a cannabis-focused financial advisory firm. A stock’s performance is largely tied to how drugs in development at the firm navigate regulatory hurdles and perform in clinical trials.
There are, he notes, a couple of key differences. One is that marijuana-based drugs face varying legal and regulatory restrictions from state to state. The other: “Although there’s anecdotal evidence for cannabis’ medical efficacy, there’s not a wide glut of clinical studies on the plant,” he says. Even established biotech firms in the sector are burning through money researching the drug’s effects. Any bet on a biotech firm focused solely on cannabis is a bet on the prospects of drugs still in development.
GW Pharmaceuticals (GWPH, $132.06) is based in Cambridge, England, but trades in the U.S. as an American depository receipt (ADR) with a market cap of $3.4 billion. GW specializes in developing drugs around cannabidiol (CBD) – a chemical compound found in cannabis – to treat epilepsy and childhood epileptic disorders such as Dravet syndrome (DS) and Lennox-Gastaut syndrome (LGS). In Phase III trials last year, the company’s flagship drug, Epidiolex, markedly reduced seizures in DS and LGS sufferers, and GW should receive a decision on its patent application in the first half of this year.
If the drug gains regulatory approval to treat DS and LGS, analysts at Goldman Sachs believe it can account for $1.6 billion in sales by 2022, up from $11 million in projected sales in 2018. They assign the stock a “Buy” rating.
Market value: $156.4 million
52-week range: $5.42-$25.95
Zynerba Pharmaceuticals (ZYNE, $11.54) is another firm experimenting with cannabidiol-based drugs.
The company’s ZYN002 is in trials to treat epilepsy, osteoarthritis and Fragile X syndrome, a genetic condition that often causes intellectual disabilities, behavioral changes and seizures. Were ZYN002 approved to treat all three, it could represent as much as $1.1 billion in annual sales, say analysts at Canaccord Genuity.
However, while trial results have been promising, the drug is at least two years away from launch, with no greater than a 40% chance of reaching the market, they say.
For those willing to speculate, they assign Zynerba's stock a “Buy” rating.