The latest trend in the investment world is the emergence of weed stocks. The good-good has taken investors by storm, despite the puns. To determine where to allocate capital, they must analyze the various aspects of cannabis business.
Many investors are intimidated at the weed business. It’s new. It’s hot. Everyone has their own opinion on which company will rise up the ranks.
The marijuana industry is much like any other Wall Street sector, there are winners as well as losers. Companies with moats or pump-and-dump programs.
This article will show you how to analyze weed stocks. You’ll learn:
- How to read weed stock price tables
Let’s blaze forward.
Know the Players: Weed Stock Fundamentals
There are three main segments to the weed industry.
Let’s break these down.
1. Weed Growers
They are self-explanatory. They are the companies. Actually growing the product in the field for either sale or as a raw material to another company’s end product. Canopy Growth (CGC), Organigram Holdings, (OGI), or Aurora Cannabis (ACB) are all examples of weed farmers.
When analyzing weed growers, the only thing that matters is the Scale of operations The company that has the largest scale advantage will be the one with the most market share. This is because they’ll produce the most volume at the cheapest price.
As they produce more products they’ll generate more revenue. This allows them to purchase more production space (acreage/farmland etc.). The cycle continues.
ACB currently produces the highest amount of weed, producing up to 700,000.00 kg per year in run rate production. The next largest grower is CGC, with an estimated 500K – 525K kilogram run-rate production capacity.
In the weed industry, scale is essential because it creates advantages for first-movers. Scale is a competitive advantage that makes it nearly impossible for others.
But there is one. Massive The disadvantage of investing in weed growers Commodity products. Weed is just like oil and cotton. It is dependent on its market price. The more money that growers make, the higher the weed price. If weed prices fall, weed-growers can sell their product for only quarters of a dollar.
2. Weed Biotechs
The focus of marijuana-based medicinal therapeutic products such as prescription drugs is what weed biotech companies do.
If I’m being honest, the best advice is to avoid biotech stocks. This segment is a good option for many reasons. First, biotech stocks generally live and die on trial results. These stocks can gyrate wild around their Phase 1, 2 and 3 results.
Stocks that show promising results in the initial stages will see a run-up into phase results. If they fall short, the shares will plummet.
We also haven’t mentioned the tremendous knowledge needed to analyze these biotech stocks, much of which required a few initials after your name.
Biotech companies are also subject to cash burn during trial periods. This requires either constant share diluting or debt financing.
You can spend your time, capital, or energy elsewhere. As in our final weed industry section.
3. Weed Picks & Shovels
This is my favorite segment of the marijuana industry. Picks-and-shovels companies make the ancillary products and services that are needed to produce or sell the end product. Packaging companies are for food and beverages. Coca Cola soft drink bottling companies. Front-end development can also be done using backend software.
These companies are often small pieces of larger operations that are protected from recessions and cost-cutting. This also means they can generate healthy margins as their end-customers aren’t as price elastic for their product.
Innovative Industrial Properties, (IIPR), KSHB (KushCo Holdings) are two examples. IIPR leases office buildings to medical cannabis companies. The company’s prospects look attractive as more states open their doors to medicinal marijuana practices. IIPR must also distribute 90% of its profits to shareholders as a REIT.
KSHB is a leading supplier of packaging to the cannabis industry. The company manufactures a variety products, including bottles and tubes, vaporizer cartridges and many more. KSHB’s sales are directly correlated with marijuana sales. This makes sense. This makes sense.
KSHB is a perfect example of a picks & shovels company. They face None of the commodity risks yet maintain an integral part in the end product’s viability.
How to Analyze Weed Stock Prices Charts
Our final component in our weed stock analysis is the price chart analysis. I am not referring complex theories such as Fibonacci sequences, or fifteen different moving Averages. We are looking to find simple support and resistance lines. Here’s what I mean.
- Support:Investors are willing to pay more for a price area that is attractive. SupportThe stock price
- Resistance:Price area InvestorsThey are eager to sell more. ResistingFurther steps higher
Analyzing charts can help us find these support/resistance points and capture breakouts/breakdowns from these areas. For example, if a price has bumped up against $15 for a few months (resistance) — then breaks out to $17 — that is the market telling us something. We should probably get long.
In the opposite direction, if a stock gains support at $10 and then falls below $8, it is likely that the market is telling us to sell more.
CGC is an excellent example. CGC has previously met $29 resistance in the past. We should see higher prices if it breaks through on the third attempt.