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The cannabis industry has been under pressure despite favorable state-wide election results in early November.
From an overextended industry-wide rally to highly questionable cabinet nominations by President-elect Donald Trump, concerns among cannabis investors have increased significantly over the last month.
In an effort to help improve investor education, we want to provide you with our top three cannabis investing strategies under a new White House administration.
A Focus on Quality, A Focus on Canada
One major difference stands out when comparing the legal cannabis market in the United States to that in Canada…
This major difference stems from the fact that medical cannabis is legal at the federal level in Canada. This means that the companies that are legally allowed to touch, to grow and to sell the plant can actually utilize important business services like banks. These companies are also able to claim taxes, write off business expenses, and operate like any other legal business in Canada.
Cannabis is still illegal in the United States and the plant is still considered to be a Schedule I substance. Companies that touch the plant in the United States are not allowed to use banks, write off expenses and benefit from basic business services.
We continue to view the Canadian cannabis industry as the most attractive sub-sector and see long-term upside potential in many of the publicly traded companies. Cannabis investors should make sure that their investment portfolio has significant exposure to the Canadian cannabis industry as we expect to see incremental growth for years to come.
Banking on Biotech
The biotech sector will be one of the greatest beneficiaries of the legal cannabis movement and recent sector weakness has created opportunities for investors.
Although President-elect Donald Trump has made some very questionable cabinet nominations, it will be impossible for any member of his cabinet to argue against science. Biotech companies focused on developing treatments from the cannabis plant have already established that cannabis has medical benefits.
Organizations across the globe continue to recognize the medical benefits associated with cannabis and it is only a matter of time before it is legalized in the United States.
From the National Cancer Institute (NCI) to the National Institute on Drug Abuse (NIDA), the medical benefits associated with cannabis can no longer be ignored. Last year, the NCI updated its website to include various studies revealing how cannabis may inhibit tumor growth by killing cells. The NIDA revised their April 2015 publication to state that marijuana can kill certain cancer cells and reduce the size of others.
Cannabis companies like GW Pharmaceutical (GWPH) continue to advance their product pipeline of cannabinoid treatments and it has been able to prove that cannabis has medical benefits. We expect to see companies like GW benefit as they develop treatments for illnesses that do not yet have a known treatment. These companies continue to work toward the development of products that will improve the daily lives of millions of people across the globe. Investors should find a lot of high-quality cannabis investments in the biotech sub-sector of the industry.
Beneficiaries of the Legal Cannabis Movement
The growth of the cannabis industry has led to the creation of sub-sectors. These sectors are comprised of ancillary businesses which are levered to the growth of the cannabis industry. These companies sell products and services such as specialty soils, climate control systems, grow lights, security solutions, and more. Over 150 years ago the market saw a similar opportunity, and today, investors have the opportunity to capitalize on it.
One of the best ways for investors to invest in the legal cannabis movement is by investing in the companies that supply the tools needed to cultivate cannabis. One such company is Scotts Miracle Gro (SMG) which has continued to add to its portfolio of hydroponic businesses.
In June 2015, Scotts’ subsidiary Hawthorne Gardening Co. purchased 75% of Gavita Holland BV for $136 million. Also in 2015, the company announced a deal to acquire Santa Rosa-based General Hydroponics. Scotts’ subsidiary also acquired its sister business Bio-Organic Options, which sells organic soils and other gardening supplies under the Vermicrop brand.
Earlier this year, JPMorgan (JPM) recommended Scotts to its clients and changed its rating to Buy from Hold because it believes Scotts’ recent hydroponics business acquisitions will pay off as legal marijuana use increases.
JPMorgan’s analyst said, “We view Scotts as a reasonably valued investment over a longer time frame as weather impacts have understated Scotts’ sales growth and Scotts’ investment in its faster growing hydroponics portfolio should provide further upside.”
Scotts Miracle-Gro has been quietly making moves to enter the cannabis industry. The company is focused on acquiring ancillary products that are levered to the growth of the industry which we believe is the right approach.
Important Investor Disclosures
Disclosure. Compensated Affiliate. This report was authored by and is property of StoneBridge Partners LLC. All information and data relied upon in drafting this report is publicly available. The author believes and considers its sources to be reliable, but does not guarantee the accuracy or completeness of any information contained in this report. Any and all information, data, analyses and opinions are provided for informational purposes only and is not intended, in any manner, as investment advice. Any projections or other information generated by StoneBridge Partners LLC regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. None of the material contained in this report is intended as a solution or offer to sell or purchase a specific stock or any other investment. This report is not directed to, or intended for distribution or use by, any person or entity that is a citizen, resident or located in any municipality, state, country or other jurisdiction where the distribution, publication, availability, or use of this report is contrary to any governing law or regulation. The securities discussed in this report may not be eligible for purchase and/or sale in certain jurisdictions or by particular individuals. It is important that you check any and all governing laws and/or regulations that may be applicable in your jurisdiction. Investing in securities of issuers organized outside of the United States, including ADRs, entail certain risks. The securities of non-United States issuers may not be registered with, nor be subject to the reporting requirements of the United States Securities and Exchange Commission. Please contact a Financial Advisor for professional advice regarding any and all securities investments. This report is intended for informational purposes only. StoneBridge Partners LLC’s officers, directors, employees, affiliates, or subsidiaries may have positions in securities covered by StoneBridge Partners LLC. StoneBridge Partners LLC receives compensation from the company and/or has a position in the securities mentioned in this report
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