...After a collapse of 97% from the peak in March 2014 to the trough in February 2016 as measured by the 420 Investor Cannabis Stock Index, prices have moved into the black for 2016. Through April, the index was up 10%, experiencing three months of consecutive gains. For some perspective, here is how the market has performed over the past few years:
In the Winter/Spring Edition, I shared some reasons for optimism for cannabis stock investors in 2016, and some of the factors I mentioned have helped improve sentiment, including the potential rescheduling of cannabis by the DEA and continued progress on legalization in Canada. The shift, though, can also be attributed to several other factors. First, out of the blue, former high-flyer Growlife (OTC: PHOT) regained its listing. The company had been suspended by the SEC for two weeks in April 2014 for reasons that still aren't clear and left to struggle on the Grey Market.. This relisting move, which sparked a rapid quadrupling in the price of PHOT and fueled trader sentiment, coincided with the lows in February.
Two key events drove prices higher in March. First, GW Pharma (NASDAQ: GWPH) announced very positive Phase 3 clinical trial results for its drug Epidiolex, which is intended to reduce seizures to patients suffering from rare forms of pediatric epilepsy. The stock quickly doubled from depressed levels and led to rallies in other companies, even if their prospects aren't really that good. Later in the month, Terra Tech (OTC: TRTC) closed on its deal to buy dispensary Blum Oakland, creating the first publicly-traded company with tens of millions of cannabis industry revenue. The company continues to make progress towards potentially listing on the NASDAQ. Through the end of April, TRTC had increased more than 400%.
In April, social network company MassRoots (OTC: MSRT) announced that it had applied to the NASDAQ, but it was rejected on May 24th. The Canadian government suggested that it will introduce legislation to legalize and regulate cannabis in the Spring next year. Germany plans to introduce legislation at that same time to create a federal medical cannabis program. While the rest of the world moves forward, there have been concerns that the U.S. might take a step back when it elects a new president later this year. While Donald Trump isn't particularly cannabis-friendly, he is not viewed as likely to interfere with the rights of states to legalize for adult use and does appear to support medical cannabis. Hillary Clinton's position is similar.
Investors in the cannabis space have enjoyed some favorable developments as well as improving prices so far in 2016, and the balance of the year could see even more interest in the space. While currently only Maine and Nevada are guaranteed to have legalization initiatives on the ballot in November as well as Florida with another attempt at medical cannabis, several other states are likely to see ballot initiatives, including Arizona and California and perhaps a few others. California has failed in the past to pass initiatives, but the new plan follows the recent enactment of a comprehensive medical cannabis program following two decades of what can be described only as chaotic. With almost 40mm residents, California is one of the largest black markets in the world. Legalization there is likely to be seen as a tipping point in the national debate.
While prices are improving for many cannabis stocks, the environment remains quite risky. Most of the stocks trade on the OTC and aren't reflective of the cannabis industry, though this hasn't stopped big rallies in the past. Along with rising prices, liquidity has improved in the market, with higher trading volumes and thinner bid/ask spreads. With potential DEA rescheduling, more clinical trial results from GW Pharma ahead and the election season just months away, cannabis stocks could see continued traction into Q4. Most market participants weren't expecting MassRoots to uplist to the NASDAQ, but doing so would have been a real boost to the market and would have opened the door to other companies to go pubic. The exchange's apparent view of the company as aiding and abetting illegal activity seems inconsistent with the idea that it is an ancillary company and makes one wonder about the power company that supplies the cultivation facility. Any company wanting to go public is now relegated to the OTC, which could serve as a deterrent, though already this year, the market has seen two higher-quality companies begin trading publicly, including a consultant that assists license applicants and, if successful, provides them with standard operating procedures to run their cultivation, extraction or dispensary facilities. Another newly trading company has sales related to packaging that could exceed $10mm over the next twelve months.
The cannabis sector remains one that is best suited for trading, but we are getting closer to longer-term investment opportunities. The Canadian sector is an exception, as the publicly traded stocks there offer fundamentals that far exceed their U.S. counterparts. Still, in the U.S., there are several companies generating revenue, though positive cash flow remains elusive. With more progress on state legalizations, the sector could attract more interest later this year, especially if investors get the opportunity to invest in some new companies that better reflect the cannabis industry.
Editor's Note: Alan Brochstein, CFA, began his career as a bond trader in NYC in 1986 with Kidder, Peabody and worked with CS First Boston and Criterion investments until transitioning to equities as a analyst/portfolio manager in 2000. In 2007, he began AB Analytical Services, where he provided research and consulting to several investment advisors while also becoming one of the most popular contributors at Seeking Alpha. In 2013, Alan launched 420 Investor, an online community focused on publicly-traded companies in the cannabis sector, and, more recently, he began New Cannabis Ventures, a news & information platform that highlights the most promising companies and influential investors in the cannabis industry.
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