As 2018 comes to a close, we can honestly say it's been one of the most successful, and yet oddest, years in the history of the marijuana industry.
On one hand, this was a year of gained validity like no other. Canada became the first industrialized country in the world to legalize recreational marijuana in October, with a handful of U.S. states also giving the nod to either adult-use or medical cannabis. We also witnessed the U.S. Food and Drug Administration approve its first cannabis-derived drug and, just over a week ago, had President Trump sign the Farm Bill, legalizing hemp and hemp-derived cannabidiol (CBD) oil.
On the other hand, marijuana stocks went under the guillotine. Despite being up modestly by mid-October, the Horizons Marijuana Life Sciences ETF, a cannabis basket ETF holding more than four dozen pot stocks, lost close to half of its value in 2018. While a great year for legitimacy, it was a miserable year to be invested in pot stocks.
Image source: Getty Images.
How to make money with marijuana stocks in 2019
Although It's unclear if 2019 will be any kinder to marijuana stock investors, there are three trends that could turn into substantial moneymakers.
1. Think small (but within reason)
To begin with, small-cap marijuana stocks appear to have considerably more to offer heading into the new year than mid- and large-cap pot stocks. That's because mid- and large-cap stocks were considerably more likely to have landed a brand-name partner in 2018, and thereby packed on a substantial valuation premium. This makes, in my view, small-cap marijuana stocks the more likely candidate to shine in the upcoming year.
Now, understand that there is a limit when "thinking small." I'm typically talking about pot stocks with a market cap of between $200 million and $1 billion. Anything smaller than $200 million is far too prone to short-term manipulation, and micro-cap stocks likely have long-term survival concerns, which is what keeps their valuations down.
One small-cap company that Wall Street may be overlooking is OrganiGram Holdings (OGRMF +1.43%), which has a market cap of around $400 million. OrganiGram is an Atlantic-based grower in Canada that expects to generate 113,000 kilograms of cannabis at peak production. What's truly unique about OrganiGram is that it's focused on a single grow site (Moncton, New Brunswick), and it's employing a three-tiered growing system within its greenhouses, which should make it exceptionally cost-efficient. In other words, OrganiGram could be generating considerably better profits per share than even its larger peers, which makes it a potential moneymaker in 2019.
Image source: Getty Images.
2. Think ancillary
Another moneymaking trend in 2019 could be to focus on ancillary pot stocks. An "ancillary" stock is a company that aids the cannabis industry without coming into direct contact with the plant. Typically, ancillary companies face lower costs, and occasionally have multiple sources of revenue, which can make them less risky when compared to direct players.
One really good example of a potential ancillary moneymaker is KushCo Holdings (KSHB +0.00%). KushCo is arguably best known for the packaging solutions it provides to more than 5,000 growers worldwide. Since federal, state, and local laws can differ all over the world, KushCo ensures that its packaging materials remain child -and tamper-resistant, and that they comply with all applicable laws. In addition, with labeling and marketing limited on packaging, KushCo helps these growers differentiate themselves in a very crowded field.
Beyond just packaging, KushCo is involved in the supply of hydrocarbon gases and solvents via its acquisition of Summit Innovations. Hydrocarbon gases are involved in the production of cannabis oils, while solvents are important for concentrate production. These high-margin cannabis alternatives could become increasingly popular in 2019, which places KushCo at the center of a fast-growing trend.
Image source: Getty Images.
3. Think CBD
Last, but not least, think about piggybacking on what could be the highest-margin trend for 2019: the push into CBD-based products.
As noted, alternative forms of consumption, like CBD oils, are expected to boast better margins than traditional dried cannabis. According to the Brightfield Group, CBD sales are expected to explode from $591 million in 2018 to an estimated $22 billion by 2022. That's a compound annual growth rate of 147%, and it's going to attract plenty of attention from within the industry and from investors. The passage of the Farm Bill in the U.S., and the expected expansion of legalized consumption methods in Canada by the upcoming summer, should give CBD-based products an opportunity to thrive.
One such company already kicking tail and taking names is Charlotte's Web Holdings (CWBHF +0.00%), a provider of hemp-based CBD products in more than 3,000 U.S. retailers. In the latest quarter, Charlotte's Web recorded $17.7 million in sales and about $2.5 million in operating income, inclusive of one-time benefits and costs. Needless to say, it's one of just a handful of marijuana stocks already generating a profit on an operating basis. The Farm Bill's passage should further allow Charlotte's Web to get its hemp-based CBD products into retail stores and, as the company's market penetration improves, so should its margins.
In 2019, think small, think ancillary, and think CBD if you want to make money in the marijuana industry.
