Our Top Marijuana Stocks For 2019:Cannabis stocks have become a hot commodity recently and many companies are looking to take advantage of this boom through a flurry of public listings. The problem for retail investors is determining which marijuana stocks make good investments. As with any high growth industry, the companies you see listed on the Canadian exchanges will not all be there in 5 years. Some will go under. There will most likely be acquisitions, and consolidation in the space leaving others to be industry leaders. As of today, there are approximately 25 TMX-listed companies that are directly involved in the cannabis industry. Of note, the TMX group operates both the TSX and TSX-Venture exchanges. Before we get into the top marijuana stocks in Canada, let’s go over some things that make the industry so promising.
Why marijuana stocks?The pot rush can be explained in one word: legalization. Governments across the world are introducing legislation to legalize the recreational use of marijuana. In Canada, one of the key platforms that the current Liberal government ran on was the legalization of marijuana. On April 20, 2016, also known as 420-day for pot enthusiasts, the Government of Canada officially announced plans to legalize marijuana. Despite opposition, the legalization took effect this past October. There are more than 4 million users of marijuana in Canada and it is expected that 10% of these users will develop a dependency.
How many people use marijuana?In 2016, Deloitte published a report that indicated at least 22% of adult Canadians use marijuana at least sometimes and about 17% are willing to try. Based on these numbers, they estimate that the recreational market can be valued as high as $8.7 billion. To satisfy this demand, the Parliamentary Budget Officer estimates that 650,000kg of recreational cannabis will be needed to satisfy yearly demand. It is estimated that the combined production and 2019 expansion projects of the 45 current medical marijuana growers in Canada is approximately 586,000 kg. The potential for explosive demand is what is driving investors into marijuana stocks.
What to look for?It’s all about production and revenue growth. The majority of marijuana companies are not profitable, as such relying on traditional valuation metrics doesn’t make sense. Investors should pay close attention to these factors:
- Sales growth – Is the company meeting sales estimates? Or are they consistently coming up short? The majority of cannabis stocks are trading at crazy P/S valuations. As such, it is essential it can grow in line with expectations
- Production growth – Is the company achieving its expected production growth? Does it have a sustainable and realistic growth plan? How has it raised capital to expand operations?
- Partnerships – Does the company have any beverage or other types of partnerships? How many recreational marijuana agreements has it signed?
- Margins – Is it a low cost producer? Is the average sale price per gram stable, declining or growing?
- Profitability – I know, we mentioned that profitability is not essential. However, if the company is profitable, it is definitely a bonus and an encouraging sing.