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Measuring Relative Strength of Marijuana Stocks

While marijuana stocks are now a very acceptable sector of the market, especially at the Toronto Stock Exchange (TSX), it is important that trader/investors acknowledge that it is a new area of investment and has the volatility to prove its infancy. Trading them is a lot like trading bio-techs or penny stocks, but for risk takers there is movement that can be potentially capitalized upon. It is difficult to find a benchmark to judge the relative strength of a cannabis company, but there is the Horizons Marijuana Life Sciences ETF (HMMJ).

Horizons Marijuana Life Sciences ETF
Horizons Marijuana Life Sciences ETF (HMMJ)

Relative strength, if you are unfamiliar with it as an indicator, can be best understood by thinking of a really strong, up-trending index like the S&P 500 which would typically indicate to investors that everything is going well as a whole in the economy. Then, think of all of the stocks that are in the index and find the ones that are not performing well. Relative to the rest of the market, these stocks are particularly weak, or have a poor relative strength. As you can see by the Horizons Marijuana Life Sciences ETF chart above, this has been a good year for cannabis stocks in Canada. The individual companies reviewed below are not part of HMMJ’s holdings, but it still gives you an idea of how they are doing relative to the sector as a whole. Simply because a company has large amounts of revenue coming in, does not mean that share prices will climb. If these companies have been on a downtrend while the sector as a whole is trending up, do you think that is a good sign?

Investing in the cannabis industry has moved beyond just hype, with investors now able to evaluate more than a dozen public companies generating substantial revenue as cannabis producers and/or retailers or providers of goods or services to the industry, with several focused solely on Canada.

Today I want to dig in a little deeper and look at the big revenue generators in the United States. First, though, I want point out that generating significant revenue is not a guaranteed predictor of a rising stock price, especially in the short term.

In declining order, based upon the most recent quarterly update (typically the quarter ending June 30th), they are:

1-Terra Tech (OTC: TRTC)
2-Kush Bottles (OTC: KSHB)
3-GrowGeneration (OTC: GRWG)
4CV Sciences (OTC: CVSI)
5-MPX Bioceutical (OTC: MPXEF)
6-mCig (OTC: MCIG)
7-GW Pharma (NASDAQ: GWPH)

Terra Tech, which also sells hydroponic produce, generated $6.05 million in direct cannabis sales from the Nevada and California markets in Q2.

Kush Bottles, which offers packaging and services across the country, produced sales of $4.72mm in its Q3 ending 5/31.

GrowGeneration, which operates hydroponics stores in California, Colorado, Nevada and Washington, reported sales of $4.11mm in Q2.

CV Sciences, which sells CBD products derived from industrial hemp and is developing a CBD/nicotine gum, generated sales of $4.08mm in Q2.

I made the point earlier that rising sales aren’t a guarantee that the stock price will rise as well. To illustrate the point, consider the performance of the seven stocks discussed over the past six months. With the exception of Terra Tech, which is up less than 2{f1d755e3d686d84b3fba3fb9da3bc25d6eb08724c18385fd50146d58c836a6dd}, the group has experienced serious declines, with CV Sciences and mCig dropping more than 39{f1d755e3d686d84b3fba3fb9da3bc25d6eb08724c18385fd50146d58c836a6dd} since early May.

For those who want to explore this group further, it is quite diverse, with three direct cannabis companies, three ancillary plays and a biotech company. Each has varying growth rates, different degrees of balance sheet strength and access to capital and deviations in near-term profitability. GW Pharma, on one valuation extreme, has a market capitalization of about $3 billion, while CV Sciences is valued at just $17 million.

A final caveat: Sometimes companies lie—even those that file with the SEC. Older readers will likely recall the deceit that brought down Enron and WorldComm, and those who don’t should make themselves aware of the risk of accounting fraud. One of the earliest cannabis stocks, formerly Medbox and now Notis Global, was sued by the SEC earlier this year for fictitious sales. This is why it’s important to dig deeper than just a cursory look at a company’s publicly stated financials. My own review of Medbox resulted in my expression of extreme caution about the company from 2013 onward.

Bottom line: Investors no longer have to buy into the cannabis sector on hype alone, as several companies are now generating substantial revenue. Still, caution is warranted, even among this group, as investors should look beyond just this single factor.

 

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