There's no denying it: Marijuana stocks have been virtually unstoppable since the year began. Although pot stocks more or less tread water during the month of March, the Horizons Marijuana Life Sciences ETF, the very first tradable cannabis exchange-traded fund, and an ETF that currently contains about four dozen marijuana stocks of varied weightings, rose by 54% during the first quarter.
But as you might have expected, quite a few pot stocks handily outperformed one of the most followed marijuana ETFs during the first quarter. That's not hard to understand when global pot sales are forecast to grow by 38% in 2019 to $16.9 billion. Yet the magnitude of outperformance for marijuana stocks compared to the broader market is astounding.
These 14 marijuana stocks couldn't be stopped in Q1
In the first quarter, the broad-based S&P 500 advanced by 13.1%, which is pretty impressive when you consider that the historic average annual return of the stock market, inclusive of dividends and when adjusted for inflation, is just 7%. But since the year began, 14 pot stocks have gained at least 70%. Here are those companies, listed in descending order.
- Village Farms International (VFF 4.61%): up 332%.
- The Green Organic Dutchman (TGOD.F -13.79%): up 100%.
- HEXO (HEXO): up 93%.
- Curaleaf Holdings: up 93%.
- Origin House: up 90%.
- OrganiGram Holdings (OGI 4.69%): up 89%.
- Green Thumb Industries: up 88%.
- Aurora Cannabis (ACB 1.80%): up 83%.
- Harvest Health & Recreation (HRVSF): up 83%.
- Innovative Industrial Properties: up 80%.
- Charlotte's Web Holdings (CWBHF 1.11%): up 80%.
- Cronos Group: up 77%.
- GW Pharmaceuticals: up 73%.
- The Supreme Cannabis Company: up 73%.
Believe it or not, there's a reason these particular pot stocks stood out to begin the year. Let's take a closer look.
Production efficiency takes center stage...
Although production isn't everything, production efficiency sure is important. On average, cannabis growers are yielding about 100 grams per square foot. But quite a few producers on this list are nicely above this amount.
For example, OrganiGram Holdings, which is laser-focused on maximizing production at its Moncton campus in New Brunswick, should produce 113,000 kilos at peak capacity while only using 490,000 square feet of cultivation space. That's more than 230 grams per square foot and over double the industry average. OrganiGram is relying on its three-tiered growing system, as well as lower supply chain expenses since it's only operating at one campus, to keep costs down.
However, superior yields aren't just for growers that have a single source of cultivation to focus on. Aurora Cannabis projects to lead the pack in peak annual output, with yours truly forecasting 700,000 kilos of production by 2021 or 2022. At the company's largest projects, such as the 800,000-square-foot Aurora Sky, 1 million-square-foot Aurora Nordic 2, and 1.2 million-square-foot Aurora Sun, production looks to come in around 125 grams per square foot, or about 25% higher than the industry average. Economies of scale are a good thing, and this should help Aurora Cannabis lower its per-gram production costs.
... but output matters, too
Then again, Wall Street and investors are still pretty enamored with aggregate production. During the first quarter, a handful of marijuana stocks wound up increasing their production forecast.
In mid-March, Quebec-based HEXO made waves when it announced that it'd be acquiring Newstrike Brands for 263 million Canadian dollars ($197 million). Having already been on pace for 108,000 kilos of peak yearly production, 40% of which will wind up heading to Quebec via a five-year supply deal, the purchase of Newstrike now puts HEXO on track to hit 150,000 kilos of annual output. It also moved HEXO into the No. 6 spot on Canada's top-producers list.
Meanwhile, The Green Organic Dutchman, which has arguably been late to the party in terms of ramping up production, announced that engineering improvements to its greenhouses will increase peak production to 219,000 kilos from a previously forecasted 195,000 kilos. Presumably, The Green Organic Dutchman is still a top-five grower with this added capacity, albeit it'll need to hit the market running if it plans to catch up with the likes of Aurora Cannabis in the supply deal department.
Dealmaking makes for happy investors
Consolidation is expected to be a pretty big theme in the cannabis industry in 2019, and the first quarter didn't disappoint.
In March, the largest U.S. marijuana deal in history was announced, with vertically integrated dispensary Harvest Health & Recreation acquiring privately held Verano Holdings for $850 million in an all-stock deal. Assuming the deal closes, Harvest Health will have 70 dispensaries open by the end of 2019, along with 123 retail licenses spanning 16 states. Additionally, more than a dozen cultivation farms and over a dozen processing facilities should be open by the end of the year, allowing the company to completely command its supply chain.
With Harvest Health already profitable on an operating basis, the expected boost in consumer visibility with this deal has Wall Street and investors pumped.
Say hello to the CBD craze
The passage of the Farm Bill in late December, which legalized hemp and hemp-derived cannabidiol (CBD), was another major driver of pot stocks in the first quarter. CBD is the nonpsychoactive cannabinoid best known for its perceived medical benefits. According to the Brightfield Group, CBD sales are expected to soar from less than $600 million globally in 2018 to $22 billion by 2022.
Arguably the biggest beneficiary of the CBD craze was Charlotte's Web Holdings. The company had its hemp-derived CBD products in almost 3,700 retailers as of the end of 2018, but should have no trouble substantially growing this figure now that hemp and hemp-based CBD products are legal in all 50 states. Not to mention, Charlotte's Web has been profitable on an operating basis for two years now. CBD products often carry high price points, healthy margins, and there's not enough supply to really pressure pricing on these products. In short, it should be clear sailing for Charlotte's Web.
Lastly, investors rallied around pot stocks that uplisted from the over-the-counter (OTC) exchange to more reputable exchanges, such as the New York Stock Exchange and Nasdaq.
The biggest gainer during the first quarter was Village Farms International, which more than quadrupled. Close to half of the stock's gains came after it moved from the OTC exchange to the Nasdaq about a month and a half ago. Being listed on the Nasdaq gives Village Farms much better visibility and volume-based liquidity, and it might just encourage Wall Street investment firms to initiate coverage on the company or take a position in the business.
It's worth noting that Village Farms is also one of a very small number of marijuana stocks to not be incessantly diluting its shareholders. With much of its revenue derived from its vegetable-growing business, the company hasn't needed to regularly issue shares to pay for greenhouse construction. This lack of share-based dilution has played a big role in pushing the company's stock higher during the first quarter.