For years, the marijuana industry has been a source of steady gains for investors. In fact, the gains have been almost too good to be true in some instances. For example, early investors in Canopy Growth, Aurora Cannabis, and Cronos Group are likely sitting on quadruple-digit percentage gains, as of today.
But the wheels have decidedly fallen off the wagon since the beginning of April. The Horizons Marijuana Life Sciences ETF, the first tradable cannabis ETF, has shed more than 31% of its value since the end of the first quarter, with nearly every major marijuana stock down by a double-digit percentage over the past five months. Persistent supply issues in Canada, high tax rates in major recreationally legal U.S. markets, and the resilience of black-market producers have been hurting most of the industry.
What pot stock weakness?
However, a combination of 13 pure-play and ancillary cannabis stocks have managed to buck this weakness. The following 13 pot stocks, listed in descending order by their gains since the beginning of April, have all moved higher as marijuana stocks, as a whole, have been clobbered.
- Zynerba Pharmaceuticals: Up 102%
- Shopify (SHOP -7.02%): 85%
- MediPharm Labs (MEDIF 1.60%): 53%
- Scotts Miracle-Gro: 31%
- Neptune Wellness Solutions (NEPT -4.72%): 29%
- Innovative Industrial Properties: 24%
- Enwave: 22%
- Valens GroWorks (VLNCF -2.44%): 18%
- Cara Therapeutics: 17%
- Planet 13 Holdings (PLNH.F 6.54%): 16%
- 22nd Century Group: 16%
- Constellation Brands (STZ -0.14%): 13%
- Auxly Cannabis Group (CBWTF -7.39%): 1%
Let's take a closer look at three trends that stand out after analyzing this list of top performers.
Ancillary players with alternative revenue streams have excelled
Arguably, the first thing that's apparent is that there aren't too many pure-play cannabis stocks on the list. Or put in another context, companies that dabble in marijuana and don't rely on pot as their primary source of revenue have done fine since the beginning of April.
Take a look at Modelo and Corona beer-maker Constellation Brands. Despite owning a 37% stake in Canopy Growth, whose stock has been taken to the woodshed over the past five months, Constellation's share price has excelled. That's because Constellation has been able to consistently deliver high-single-digit growth in beer sales -- partly due to higher pricing, but mostly as a result of premium brands outperforming their competition -- and mid-single-digit growth in wine and spirit sales. When combined with ongoing share repurchases, Constellation Brands could continue to grow earnings per share by roughly 10% on an annual basis.
Then there's Shopify, which provides e-commerce and point-of-sale solutions for select Canadian provinces but generates the bulk of its sales outside of the cannabis industry. During the second quarter, Shopify saw sales grow 48% year over year, with merchant solutions revenue up 56% and subscription solutions up 38%. Further, the amount of gross merchandise volume handled by Shopify's e-commerce solutions soared 51%, to $13.8 billion, in the second quarter.
Suffice it to say that results like these make ancillary investors forget about problems in the cannabis industry.
Extraction-service providers are arguably the hottest thing since sliced bread
You might have also noticed that three of the top-performing stocks since the end of March are extraction-service providers: MediPharm Labs, Neptune Wellness Solutions, and Valens GroWorks.
The reason extraction-service companies are all the rage has to do with the upcoming launch of derivative products in Canada in December and projections of incredible growth in U.S. cannabidiol (CBD) sales. According to the Brightfield Group, CBD sales in the U.S. could average more than 100% growth annually through 2023. These extraction service providers are being tasked with taking cannabis and/or hemp biomass (depending on the country) and turning them into resins, distillates, or cannabinoids that can be used in high-margin derivative products.
In recent months, all three extraction-service providers have landed big-time deals.
- MediPharm Labs nabbed a $30 million contract for cannabis concentrates from Cronos Group over an 18-month period that could be expanded to $60 million over 24 months.
- Valens GroWorks secured a two-year deal with HEXO that'll see an aggregate of 80,000 kilos of hemp and cannabis biomass extracted, with HEXO netting high-quality resins and distillates in return that it'll use in derivative products.
- Neptune Wellness Solutions signed three-year extraction deals with Tilray and The Green Organic Dutchman totaling a respective 125,000 kilos and 230,000 kilos of cannabis and hemp biomass.
In short, extraction companies are going to be busy and have plenty of predictable cash flow for years to come.
Truly unique cannabis plays have stood out
Lastly, you'll note that the pure-play cannabis stocks that have outperformed tend to be unique.
For example, vertically integrated dispensary-operator Planet 13 Holdings isn't anything like its peers. Instead of trying to open as many retail locations and grow farms in as many legalized U.S. states as possible, Planet 13 has focused on creating the most unique experience possible for consumers. The company's flagship SuperStore, just west of the Las Vegas Strip, will span 112,000 square feet when complete (that's the largest dispensary in the world, to my knowledge), and it's seen rapid growth in average visitors per day, as well as a $12 increase in average ticket since the store opened in November 2018.
Auxly Cannabis Group, even though it's only up by 1%, is also unique. Auxly is predominantly a streaming company. It has more than a dozen licensed partners that it supplied capital to in exchange for a percentage of their output at a below-market cost. The company also secured a 123 million Canadian dollar convertible-note investment from tobacco giant Imperial Brands in July, relieving any near-term cash concerns and allying Auxly with an experienced global retailer and marketer.
Though cannabis stocks are mostly being taken to the woodshed right now, there are bright spots in the group.