This year has really been a tale of two halves for the cannabis industry.
The first quarter probably couldn't have been any better, with the Horizons Marijuana Life Sciences ETF, which holds more than four dozen pot stocks of various weightings, gaining over 50%. We also witnessed 14 popular pot stocks rise by more than 70% during the first quarter.
But the second quarter has been sort of a buzzkill for marijuana stock investors. The aforementioned Horizons Marijuana Life Sciences ETF has declined more than 14% in the second quarter, with a whopping 35 cannabis stocks losing a double-digit percentage in May.
Some might view this drop as a sign that the marijuana bubble is bursting, and that may very well be true for a number of untested companies. Then again, others might see this drop in pot stocks as a means to snag high-quality companies on the cheap for the long run.
As we ready to enter the second half of the 2019 campaign, the following marijuana stocks look to be the absolute best buys.
If I were only allowed to choose one stock, right now, that I think is the best value in the entire cannabis industry, it would be CannTrust Holdings (CNTTQ). Of course, you should take that statement with a grain of salt given that it's one of two marijuana stocks that I currently own.
CannTrust has lost half of its value over the past three months, partly because its fourth-quarter operating loss was wider than expected, and the company signaled that near-term costs would keep it in the red for at least a few quarters. The other reason for weakness ties into the company's shelf offering at $5.50 a share that raised $170 million. This offering was priced at an almost 15% discount to where the company's share were trading the day before it was announced.
That's the bad news. Now, here's the exciting news.
With its newfound capital, CannTrust is planning to acquire up to 200 acres of land, and utilize this land for outdoor growing purposes. This cash will also aid in the phase 3 expansion of its flagship Niagara campus, which focuses on hydroponic growing methods. Most of this outdoor crop, which should total 100,000 to 200,000 kilos a year, will be used for extraction purposes to create high-margin derivative products, such as edibles, infused beverages, concentrates, or vapes. A full gamut of derivative options will get the green light from Health Canada by no later than mid-October, paving the way for CannTrust to substantially boost its margins.
At a market cap of just over $700 million, CannTrust is one of the cheapest growers on the basis of full-capacity production. Add in the fact that its hydroponic Niagara campus should produce marijuana at a below-industry average cost per gram, as well as the fact that it's on track for recurring profitability in 2020, and it looks to be the industry's top cannabis stock to buy in the second half of 2019.
I'm a firm believer that every marijuana stock investor should diversify their portfolio with an ancillary player (i.e., a company that isn't directly involved in touching the cannabis plant). I can think of no better buy in the ancillary space than KushCo Holdings (KSHB), the other pot stock I own.
KushCo has been running in place for much of 2019 as the result of ongoing operating losses, weaker-than-expected gross margin, and an accounting snafu that led to a restatement of the company's 2017 and 2018 full-year results. This statement boosted operating income slightly in 2017, but led to a much wider net loss in 2018.
While these are, indeed, bad-news events, nothing is particularly worrisome about any of these adverse events. The accounting error had no impact on revenue, cash on hand, or cash flows, so simple governance changes will resolve the issue. Likewise, lower gross margin was primarily the result of tariffs being implemented on its Chinese-based vape product imports. With the company now passing along these higher costs to consumers, rather than KushCo eating this higher cost, margins will improve.
What I see in KushCo is a company that's at the center of three niche trends. It's a key player in the packaging and branding solutions space, with more than 5,000 growers in 25 countries as clients. KushCo ensures that its clients remain compliant with federal, state, and local laws, and should see a steady uptick in demand as legalizations continue around the world.
KushCo also expects significant growth from its vape business. With Canada set to wave the green flag on derivative products within the next couple of months, and the company no longer eating tariff costs, KushCo's vape business could be a serious moneymaker in the years to come.
Third and finally, the company provides hydrocarbon gases and solvents used in the respective manufacture of cannabis oils and concentrates. Not to sound like a broken record, but the expected surge in derivative sales later this year places KushCo in the right place at the right time.
At far less than two times next year's sales projections, KushCo looks like a major bargain in the cannabis space.
The old investing adage is that cheap stocks are often cheap for a reason. But if you can find a valid reason why U.S.-based vertically integrated dispensary operator Trulieve Cannabis (TCNNF -1.93%) is trading at less than 12 times next year's profit projections, feel free to pass that information my way.
To be sure, Trulieve does have its negatives. For example, a number of new players are set to enter its home market in Florida, including MedMen Enterprises. It's also possible that Trulieve's margins could decline as it aims to make a name for itself in markets outside of Florida, such as California, Connecticut, and Massachusetts. However, none of these concerns appears crippling to Trulieve's bottom line, and that's all that really matters.
Unlike its peers that control the seed-to-sale process in the U.S., Trulieve Cannabis isn't trying to infiltrate more than a dozen states at once. Trying to tackle multiple markets at once is a big reason why companies like MedMen have been losing money hand over fist on an operating basis. Rather, Trulieve has focused almost entirely on Florida, opening 28 of its 30 dispensaries in the Sunshine State. Even though Florida is legal for medical marijuana purposes only, Trulieve's breadth throughout the state has placed it at the top of the pack in terms of market share.
As of the company's most recent quarterly report, it's expecting full-year sales to more than double to a range of $220 million to $240 million in 2019, up from $102.8 million last year, and then make a run at $380 million to $400 million in revenue in 2020.
Until Trulieve Cannabis gives investors a real reason to be worried about its future, its forward price-to-earnings ratio of less than 12 looks like a steal.
A fourth and final top marijuana stock to buy in the second half of 2019 is cannabidiol (CBD) powerhouse Charlotte's Web (CWBHF -2.70%). CBD is the nonpsychoactive cannabinoid that's best known for its perceived medical benefits.
The recent decline in Charlotte's Web, which has seen the stock give up more than half of its market cap since hitting an all-time high in early April, can be described as: (1) part profit taking, and (2) part major investors wanting out. A shelf offering by investors at 15 Canadian dollars, or about a 25% discount to where Charlotte's Web was trading at the time, saw close to 8 million shares trade hands. Even though the company didn't raise a dime from this offering, the fact that investors were willing to bail at a nearly 25% discount ransacked this stock.
Then again, near-term pain could be your long-term gain. There's probably not a faster-growing segment within the cannabis industry than CBD, which may hit $22 billion in annual sales by 2022 in the U.S., up from just $591 million in 2018. Charlotte's Web, which extracts CBD from hemp plants, is the market leader in CBD-based topicals, capsules, and oils, in the United States. Between the end of December and the end of March, Charlotte's Web increased its retail door count from 3,680 to more than 6,000.
And this is really just the beginning. Charlotte's Web announced plans to more than double its hemp harvest to cover 862 acres, up from 300 acres in 2018. With industrial hemp production and hemp-derived CBD now fully legal in the U.S., the red carpet has been rolled out for Charlotte's Web and its high-margin product portfolio.
Right now, Charlotte's Web has a forward price-to-earnings ratio of less than 17, yet its sales could nearly double in 2019, and more than double in 2020, once it really feels the impact of its 700 acres of harvesting and extraction. That makes Charlotte's Web a top pot stock for the second half of 2019 that investors should consider buying.