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Buying Biotech Cannabis Stocks on Weakness

Sep 12, 2016 • 12:33 PM EDT
Biotechnology.jpg
3 MIN READ  •  By Michael Berger
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The cannabis sector came down from its highs on Friday as global markets plunged on heightened concerns over higher interest rates.

The Nasdaq was the hardest hit and the exchange fell more than 2.5%, while the Dow and S&P 500 dropped more than 2% each.

What to Expect Today?

This market is poised to open lower this morning as global markets are still concerned over a possible rate hike when the FOMC meets next week.

We expect the United States market to trade weak as investors wait to hear from Fed Governor Lael Brainard at 1:15pm EST. The reason why her speech is significant is because Brainard is a voting member of the FOMC and she is typically known to be a dove, meaning that she is less likely to raise interest rates.

Today, Governor Brainard will speak on the economic outlook and monetary policy. We expect the market to plummet if she delivers a more hawkish tone, meaning that she supports raising interest rates. 

How Will Cannabis Stocks Respond?

Although most cannabis stocks are very much insulated from interest rates, the largest ones are not and this could cause near-term weakness for the entire sector.

Biotech cannabis companies will be most affected by higher interest rates because of their reliance on the secondary markets. These companies operate in a capital intensive industry and need to raise funds to support expensive clinical studies.

Biotech stocks levered to the cannabis industry saw heavy weakness on Friday and the iShares Nasdaq Biotechnology ETF (IBB) ended the day down more than 3.2%. The IBB serves as a benchmark for the biotech industry and we find it helpful to compare a stock’s performance to the IBB’s performance.

Biotech Cannabis Stock Plunge

Biotech stocks levered to the cannabis industry were hit pretty hard on Friday as GW Pharmaceutical (GWPH), Insys Therapeutics (INSY), and Zynerba Pharmaceutical (ZYNE) fell 4.7%, 7.2%, and 8.9%, respectively.

Although this group of stocks saw heavy weakness on Friday, two of them ended the week up more than 15%. We expect to see further weakness today as the Nasdaq continues to come down from its all-time high. We have provided our investment thesis on these three stocks.

  • GW Pharmaceutical (GWPH): The market is starting to doubt the acquisition rumors and we expect GWPH to fall another 10% if a deal falls through. We continue to remain favorable on GWPH and will add to our position on further weakness due to: 1) it being the one pure-play cannabis biotech investment opportunity, 2) its continued success with its Epidiolex product, 3) its deep pipeline of products that will provide GW with catalysts for years to come, and 4) it is trading below the average Wall Street price target.
  • Zynerba Pharmaceutical (ZYNE): Although ZYNE fell almost 9% on Friday, the shares were one of the top performers last week. ZYNE rallied more than 15% last week and we continue to monitor the shares for a bottom. ZYNE broke below the $10 level on Friday and its shares are trading right above their 20-day moving average. We expect to see further weakness today and will let you know when we think the shares have found a bottom.
  • Insys Therapeutics (INSY): Although the most important rule of investing is to not invest on your emotions, we find it tough to remain favorable on Insys after the company donated $500,000 to oppose the campaign for legal recreational cannabis in Arizona. This news comes after two former employees pleaded not guilty to federal charges related to an alleged kickback scheme to get doctors to prescribe its product, Subsys. We are cautious with INSY and continue to prefer GW Pharmaceuticals and Zynerba Pharmaceuticals.

Do Your Due Diligence

The cannabis industry is one of the most rapidly developing and controversial industries in the United States. Although there is a lot of opportunity in this sector, investors and traders need to do their due diligence before creating a position.

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Authored By

Michael Berger

Michael Berger is Managing Partner of StoneBridge Partners, LLC and Founder of Technical420.com. Prior to entering the cannabis industry, Michael was an Equity Research Analyst at Raymond James Financial covering the Energy Sector. Michael has been featured in publications such as The Street, Bloomberg, US Money News, and hosts various cannabis events across North America.

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