Is There Life Left In Cannabis / Commodities / Cannabis

A year ago today,the cannabis sector was booming. Everyone seemed to want a piece of the sectorthat was sure to continue flying in the long run. The only problem - thatwasn’t the case!

As soon as Canadalegalized adult use cannabis, it seemed as though all the hopes of strong salesflew out of the window. Aurora Cannabis (ACB) traded at more than $11 per sharein mid-October, 2019. By mid-December, it had fallen to under $5 per share. CanopyGrowth (CGC) hit highs of more than $55 in October, falling to under $27 pershare in December. Tilray (TLRY) was trading at more than $175 per share inSeptember of 2019, By December, it had fallen to below $70 per share and is nowtrading at around $30 per share.

With theexception of stocks like Tilray, most cannabis stocks are trading on gains overtheir December lows, but a dark cloud of overvaluation and regulatoryspeculation is still hanging over the sector.

Does this meanthat there’s nothing left for investors in cannabis? I don’t think so. It justmeans that if you want to get into this emerging, multi-billion dollar sector,you’ve got to think outside the box.

WhereMost Cannabis Investors Are Looking

There’s no doubtthat most cannabis investors are looking at largeCanadian players like Aurora, Tilray and Canopy Growth. In my view, this is abig problem.

While we haveseen substantial declines from mid-October highs in Canadian pot stocks,there’s a very real argument that these stocks are still tremendouslyovervalued. Most in the sector are trading at more than 50 times forwardlooking revenue.

From afundamental standpoint, there’s a demand issue starting to lead to concern.With major cannabis growers all working to take their share of the space, we’reseeing increased production capacity across Canada. As supplies rise, the lawof supply and demand tells us that the price must fall. So, reducing dried flowerprices are likely to cause pain in forward-looking revenues.

Bulls argue thatthe supply issue will level out once the United States Federal Governmentlegalizes adult-use cannabis nationwide. Sure, that’s a great idea, but theidea is built around speculation. Let’s remember, there’s a republicanpresident in office and republicans have been known to be against cannabis.

The bottom lineis that overvalued Canadian cannabis companies are not a good bet at themoment. With speculation-fueled arguments and ridiculous valuation metrics,it’s likely best to stay away.

WhereInvestors Should Be Looking

While Canadiancannabis plays are just about dead on the vine, I believe that there’s quite abit of opportunity right here at home. In fact, smaller, American companies arepoised to run for multiple reasons.

In the UnitedStates, cannabis is illegal federally. However, there are several states thathave legalized the use of marijuana for medical purposes, recreationalpurposes, or both. These markets have combined values in billions of dollarsannually.

On the otherhand, these companies have largely been starved of investment dollars as thelarger investing community focused on Canada. This has led to largeundervaluations in a market that could be just as large, if not larger.

Here are somegreat examples:

Vapen MJ(VAPNF): A Growing Brand Presenting Opportunity

Vapen MJ is arecently public company, and while the market hasn’t quite reacted to theopportunity, there’s real promise here. The company is focused on theproduction of cannabis and various cannabis products, including THC and CBDcartridges, edibles, flower, and more, but there are plenty of other companiesdoing that. What makes Vapen special?

From thebeginning, the company has had an unmatched focus. At first, the companyfocused on the Arizona market, taking the region by storm. The company had suchsuccess in the region, that it has caught the attention of mainstreamcelebrities, including Wiz Khalifa, Cardi B, and several others.

With the Arizonamarket tapped, the company is looking to the larger opportunity, expanding itsbrand across the United States. The company has signed agreements to bring itsbrands into Nevada.. It is also in process of bring its brand into largermarkets like California, Ohio, Massachusetts, Oklahoma  and Michigan, only further expanding theopportunity.

Importantly, the company is already generating profit, something thatwasn’t seen in the Canadian cannabis sector until very recently, while stockswere already trading on billion-dollar valuations. Not to mention, the stocktrades with a market cap that’s just 2.3 times its 2019 revenue run rate of $27million, speaking volumes to its undervaluation!

Charlotte’sWeb (CWBHF): A CBD Play Worth Your Attention

On the other sideof the spectrum, we have Charlotte’s Web. Instead of focusing on the cannabisside of the equation, the company is heavily focused on the CBD space.

Due to thepassage of the 2018 United States Farm Bill, hemp, and hemp derivatives,including CBD were legalized for production and sale. Even before this was thecase, Charlotte’s Web was manufacturing and selling CBD products in stateswhere the hemp-derived compound was approved.

The companyoffers a long line of products including salves, lip balms and much more.Considered to be a top-notch brand, Charlotte’s web products can be found onthe shelves of multiple national retailers, including CVS and Kroger.

As Charlotte’sWeb continues to expand its retail footprint, taking hold of the national CBDmarket, the company is presenting an opportunity that’s hard to ignore.

TheBottom Line

The bottom linehere is simple. Canadian cannabis stocks are getting all of the attention, butthey don’t deserve it. These stocks are largely riddled with overvaluations anddriven by speculation that global regulations will change ahead. On the otherhand, there are plenty of opportunities here in the United States that offer areal opportunity for growth!

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By Joshua Rodriguez

© 2019 Copyright Joshua Rodriguez - All Rights Reserved

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