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Marijuana Stocks

Golden Cannabis Opportunities in the Golden State

The Golden State has long been the land of plenty for investors and wealth seekers.

In the mid-1800s, fortune hunters rushed to California in search of gold.

A little more than half a century later, Hollywood’s film industry was born. To this day, people flock to Los Angeles to seek their fortunes as stars on the big screen.

And since the 1980s, Silicon Valley has churned out more innovators, millionaires, billionaires and venture capitalists than almost anywhere else in the world.

But our current multibillion-dollar California dream began in 1996, when the state legalized medical marijuana. This was the first bud of the green revolution sweeping the country.

Twenty years later on New Year’s Day of 2018, the state greenlit adult-use. And products started flying off the shelves.

California is the largest legal weed market in the world. Projections are for sales to top $11 billion by 2030.

But it hasn’t been smooth sailing. Given taxes, licensing issues and that pesky illicit market, the Golden State’s cannabis industry hit some rough waters.

Then it got smacked by a rogue wave in the form of the vaping crisis.

A total of 2,758 e-cigarette, or vaping, product use-associated-lung injury (EVALI) cases have been reported to the Centers for Disease Control and Prevention across all 50 states. And the illness has claimed 64 lives.

We now know the culprit is the additive vitamin E acetate used in knockoff vape pen cartridges. In January, California’s Bureau of Cannabis Control seized more than 10,000 vape cartridges from unlicensed retailers.

And not surprisingly, the outbreak resulted in a steep – albeit brief – decline in vape pen sales across the country.

But like most outbreaks, it was short-lived. The EVALI cases peaked in September before trailing off.

Chart - Hospital Admissions in EVALI Cases

And as the crisis faded into the background (only to be replaced by coronavirus half a world away), some normalcy returned to the cannabis markets.

In turn, California’s massive marijuana industry is starting to perk back up.

In December, the state’s cannabis dispensary and delivery sales reached $251.7 million.

To give you some perspective on the size of California’s market, cannabis sales in my home state of Maryland totaled $252 million for all of 2019.

Now, because of the EVALI crisis, the Golden State’s concentrate sales declined 6% in December to $82.2 million. (Vape pens account for more than 80% of this category.)

But consumers didn’t flee from cannabis. They simply moved to flower or pre-rolls.

Chart - CA Marijuana Sales by Category

In fact, pre-roll sales leapt 48% in December.

And I wouldn’t count vape pens out.

In 2019, California’s total marijuana sales increased 18% to $3 billion. But despite the vaping crisis – and despite the drop during the peak months of the EVALI outbreak – vape pen sales grew 28% to $851.2 million.

As time passes and the crisis becomes a distant memory, the market will bloom. And vape pens will resume their dominance.

Those high-margin products offer a golden opportunity for Golden State pot stock investors.

The High Five

Below are our High Five, where each Monday I cover the five pot stocks I believe will make major moves – up or down – in the week ahead.

1) GW Pharmaceuticals (Nasdaq: GWPH) will report fourth quarter earnings tomorrow after the closing bell.

This will be a monster quarter for the Epidiolex maker. Revenue is projected to grow 1,479.5% to $105.1 million, as its loss per share is expected to decline from $2.40 to $0.75.

2) MedMen Enterprises (OTC: MMNFF) will release second quarter results on Wednesday after the closing bell.

Wall Street is looking for $50.63 million in revenue. And the company’s loss per share is expected to decline from $0.25 to $0.09. For fiscal year 2020, MedMen’s revenue is projected to be $212.78 million. That’s double the dispensary operator’s current market cap.

3) Innovative Industrial Properties (NYSE: IIPR) will also report earnings after the bell on Wednesday.

Analysts are looking for fourth quarter revenue to increase 200% to $14.37 million with earnings per share of $0.57. The real estate investment trust has topped expectations for the last two quarters. Shares are off to a strong start in 2020, up more than 40%. And the company has 145,000 square feet of grow space leased in California.

4) Cronos Group (Nasdaq: CRON) is releasing fourth quarter results on Thursday before the market opens.

Revenue is projected to grow 192.5% to $12.4 million with a loss of $0.04 per share. Cronos, with its $1.8 billion investment from Altria (NYSE: MO), is poised to be a primo vape pen player.

5) Acreage Holdings (OTC: ACRGF) began selling adult-use cannabis in Illinois last week. The multistate operator will release fourth quarter earnings tomorrow after the closing bell. Expectations are for a 372% increase in revenue to $49.43 million with a loss of $0.21 per share. It’s been building its presence in California.

So far in 2020, GW Pharmaceuticals and Innovative Industrial Properties are crushing the Horizons Marijuana Life Sciences Index ETF (OTC: HMLSF).

Chart - The High Five

I routinely mention that cannabis pick-and-shovel-type plays, like Innovative Industrial Properties and GrowGeneration (Nasdaq: GRWG), are some of my favorite (and safest) options.

Plus, Innovative Industrial tends to outperform when broader cannabis struggles. That’s in large part thanks to its attractive 3.75% dividend yield, a true rarity among pot stocks.

Last year provided plenty of obstacles and hurdles for pot stock investors. But 2020 should see some normalcy return. And that should translate into profits.

If you have a pot stock in mind that you’d like me to discuss here, leave a comment below.

Here’s to high returns,

Matthew


About

Matthew’s expertise ranges from classic industries such as oil and mining to cutting-edge markets like small cap tech, cannabis, 3D printing and cloud computing. With almost two decades of financial experience under his belt, Matthew’s knack for finding market trends never fails to surprise us, which is why we keep a close eye on his free e-letter, Profit Trends.

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