Special Investor Report
Three Top Stocks For The Marijuana Investor
The future is bright for the Cannabis Industry!
Cannabis stocks have been on a two-year run and are expensive as the market is trying to figure out who will carve out their niche, who will be acquired and who will survive. One thing is clear – this is a rapidly growing marketplace and its dog eat dog race to capture marketshare.
While the global legal marijuana market was estimated at $14B in 2018, it is projected to grow at a CAGR (compounded annual growth rate) of 24% to 2025. The Canadian cannabis market, in particular, is expected to generate up to $4B in legal sales for 2019. A newly released report from Arcview Market Research and BDS Analytics calls for more than $40 billion in global licensed-store sales by 2024, which is almost quadruple what was generated in 2018. By the end of the next decade, cannabis cheerleader Cowen Group has called for $75 billion in annual worldwide sales.
Relaxed legalization in various countries is driving the cannabis market place higher. Recently, the state of Illinois signed a recreational marijuana legalization bill into law, paving the way for the creation of a potential $2 billion market with strong business opportunities. With the signature, Illinois becomes the first state in the country to legalize retail sales through its Legislature and the 11th overall to approve adult use.
Furthermore, growing adoption of cannabis as a medical product is also expected to fuel revenue growth in the coming years.
One of the highest growth trends for the cannabis industry is oil extraction, which is used in many alternatives to smoking or vaping cannabis flower, including edibles and concentrates. In some markets, the share of flower has declined to 50% with oil products making up the balance.
As more and more entrants flood the market with flower, wholesale prices have been falling. Its our belief that in time , that prices will grind down to the lowest cost provider – hardly a growth business. In fact, the slow rate of the government approving LP licenses is helping keep prices high. Flower sales still dominate, but extracts make up the fastest growing segment of the cannabis industry.
“Cannabis extraction is a huge growth opportunity in Canada. The reason I say that, is because if you look to the U.S., it was not uncommon to see 75 per cent of the market consuming cannabis flower years ago but as product offerings became more differentiated, we saw the market for flower drop to around 40 per cent, and the market for oils surge to over 60 per cent,” said Beau Whitney, a senior economist at the cannabis research firm New Frontier Data who was previously involved in the cannabis extraction business.
We think that the best growth opportunity are cannabis extraction companies
So this week we’re introducing our list of the top three pot stocks investors should watch.
First up is Valens GroWorks (VGW.CN), which claims to be the largest third-party extraction company in Canada. Valens continues to experience significant demand for its services and is accelerating its growth to ensure the company continues to meet the growing demand of its partners. They announced recently that they substantially increased its annual extraction capacity to 425,000KG of dried cannabis and hemp biomass and have plans to boost production to a million+ by 2020.
The institutional coverage is picking up and their anticipated listing on the TSXV is expected this summer.
Market Capitalization: $391M cad
Neptune Wellness Solutions
Recently changed its name from Neptune Technologies & Bioresources, has transitioned itself from nutraceuticals (foods with medical benefits) to focusing on extracting compounds from marijuana. It has landed a number of key deals in the last year and most recently inked a three year extraction deal processing 125,000 kilos of hemp and cannabis biomass with Tilray (TLRY). Not to be content, they turned around and landed another monster deal with Green Organic Dutchman (TGOD.TO). This 230,000 kilo contract will see Neptune process 20% of the biomass for the first of three years. Clearly Neptune has come out the gate at a blistering pace and we expect their sales to continue to ramp up in the coming years, underpinning a solid valuation for their company.
Market Capitalization: $361M cad
Lastly but not the least is Ontario-based MediPharm Labs (LABS.V) together with its subsidiaries, produces and sells pharma-grade cannabis oil and concentrates for derivative products in Canada and Australia. It also provides cannabis contract processing services to licensed producers and growersand a white label business.It has signed up a number of quality names for its services, including premium-quality producer Canopy Growth, Cronos Group and Supreme Cannabis Company. During 2019, MediPharm announced they will be expanding its extraction capacity by 60%, from its current 150,000 kilos per year to 250,000.
Watch for continued deal flow from MediPharm which will drive earnings and valuation.
Market Capitalization: $615M cad