Marijuana—or cannabis, to use the all-encompassing term—is the fastest-growing industry in America, growing at a rate of 47% in the latest year. Marijuana stocks are growing even faster.
It’s not hard to understand why.
Canada has legalized the drug nationally, and since the switch in that country was flipped in October, companies in Canada have been struggling to find enough marijuana supply for the booming legal market.
Here in the U.S., federal marijuana law hasn’t changed yet, but state by state, legalization is progressing, and hemp is now legal nationwide, which has been a boon to the CBD industry.
Cannabis Stocks to Consider
Aphria (APH), Aurora (ACB), Canopy Growth (CGC) and Cronos (CRON) are the leaders to watch in Canada, but they are all overvalued to some extent, while HEXO (HEXO), Organigram (OGRMF) and The Green Organic Dutchman (TGODF) are not as famous and are also better values.
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These winners should go much higher in this market—don't miss out!
In the U.S., meanwhile, the feds still have a ways to go before full legalization of cannabis, but state-by-state, progress is being made, and vertically integrated multi-state operators are getting big fast.
Stocks to consider here are Acreage Holdings (ACRGF), Cresco Labs (CRLBF), Curaleaf (CURLF), Green Thumb Industries (GTBIF), Ianthus (ITHUF), MedMen (MMNFF) and Trulieve (TCNNF).
And then there are the CBD companies! Since the Farm Bill was passed last December, this sub-sector of the industry has been booming, as consumers, spurred by the experience of friends, try CBD for whatever ails them. From insomnia to PMS, arthritis to PTSD, there’s a chance, according to proponents, that CBD can help.
Stocks to watch here include CBD Unlimited (EDXC), Charlotte’s Web (CWBHF), CV Sciences (CVSI), Elixinol (ELLXF), and Isodiol (ISOLF), as well as English pharmaceutical giant GW Pharmaceuticals (GWPH).
How to Choose Marijuana Stocks
I like to use four principal factors when evaluating marijuana stocks.
Growth is first. If a company isn’t growing revenues at a very good pace, it doesn’t warrant my attention. As I write, the average company in my marijuana portfolio increased revenues 298% in the latest quarter compared to the year before. Business is booming! So if a prospect is not growing revenues at a rate of at least 100%, I probably won’t consider it.
Story is second. I need to see a story that tells me 1) that this company can grow fast and become one of the long-term winners in the industry or 2) that this company, while it isn’t growing fast, has a rock-solid defensive position that will enable its stock to resist the occasional big correction in the sector.
Chart is third on this list, though it could easily be first. The movement of the chart reflects everything that investors know about the company and its prospects, so if the chart doesn’t tell me that investors’ perceptions of the company are improving, I’m not buying, regardless of the story. Case in point today is Tilray (TLRY), which saw revenues grow 204% in the fourth quarter, but has a chart that keeps on sinking.
Avoid charts like this.
Value is definitely last in this list when it comes to marijuana stocks. These companies are growing so fast—and so few have real earnings—that traditional valuation metrics are next to useless. So I look at relative valuations in the group, looking at the price/sales ratio (PSR) of each stock, and that has been helpful.
Make More Money in Up Markets
The biggest reason my readers have outperformed the marijuana index this year is simple: we’ve been invested in smaller, less-popular stocks that are going up. Some of these are Canadian companies, some are headquartered in the U.S., but all of them are growing fast and the majority are still not as popular (overvalued) as the big Canadian producers.
Look for charts like this!
Lose Less Money in Down Markets
Of course, this year the action has been pretty much up, up, up, with the occasional sharp correction to keep investors from getting too complacent. Someday, however, the trend will turn down, and when it does, my goal is to help my readers lose less than the index. So, just last week, in my latest issue of Cabot Marijuana Investor, I made four adjustments to my portfolio, all designed to help my readers lose less when the next correction comes.
By leaning against the wind (which includes taking partial profits and raising cash) I guarantee that when the correction comes, my readers will lose less money than the averages.
The Bottom Line on Marijuana Stocks
By following this strategy, my Cabot Marijuana Investor portfolio is up 46.7% year to date, while the Marijuana Index is up “just” 41.7%.
If you’d like to join my happy readers, click here.
Timothy Lutts heads one of America’s most respected independent investment advisory services. Each week, Tim personally picks the single best stock in his exclusive Cabot Stock of the Week advisory. Build your wealth and reduce your risk with the top stock each week for current market conditionsLearn More