True to Halloween, October was another ghoulish month for cannabis stocks. After rocketing higher during the first quarter of the year, marijuana stocks have been in a precipitous seven-month downtrend. Last month, a majority of pure-play pot stocks ended the month lower, with the Horizons Marijuana Life Sciences ETF, the first exchange-traded fund focused on marijuana, losing another 12%. Since the end of March, this popular ETF has lost 50%, inclusive of dividends paid.
October featured many of the same concerns that have plagued the North American pot industry over the past year -- namely, the exceptionally slow rollout of physical dispensaries in Canada (along with a slow licensing process) and high tax rates in select U.S. states curbing legal sales channels.
These are, unquestionably, the top pot stocks for October
However, a small handful of cannabis stocks managed to buck October's weakness. Excluding a handful of brand-name stocks that are merely dipping their toes into the cannabis pond, the following nine pot stocks ended the month higher by a double-digit percentage (listed in descending order, and rounded to the nearest percentage point):
- KushCo Holdings (KSHB): Up 35%
- Liberty Health Sciences: Up 32%
- Trulieve Cannabis (TCNNF 2.50%): Up 24%
- MediPharm Labs (MEDIF -0.59%): Up 23%
- Green Growth Brands (GGBXF): Up 22%
- CV Sciences (CVSI 4.09%): Up 20%
- iAnthus Capital Holdings: Up 16%
- GW Pharmaceuticals: Up 16%
- Greenlane Holdings: Up 16%
What allowed this group of cannabis stocks to outperform while the rest of the industry went up in smoke? Let's take a closer look.
Profitability is being rewarded
For starters, it shouldn't come as a surprise that investors are rewarding profitability. In a space where losses are common, multistate operator Trulieve Cannabis, extraction-services provider MediPharm Labs, and hemp-based cannabidiol (CBD) products company CV Sciences are all currently profitable.
In particular, Trulieve Cannabis has really stood out with its bottom line. Based in Florida, Trulieve has opened 38 stores in its home state. Keeping its costs close to the vest, so to speak, has allowed Trulieve to effectively market its medical marijuana products, as well as build its brand. This allows it to report an operating profit without the one-time benefits that other pot stocks have leaned on to generate a profit. While it's possible that Trulieve's margins will get pinched a bit as competition in Florida intensifies, and as it builds up its brand in states like California and Massachusetts, there's little concern about the company remaining profitable.
Encouraging operating results fuel marijuana stocks higher
As noted, most marijuana stocks aren't profitable. However, some are at least demonstrating progress with their operating results -- and that's being rewarded by Wall Street more often than not.
Last month, cannabis-infused products manufacturer and multistate retail operator Green Growth Brands reported its fourth-quarter operating results. Sales in the fourth quarter totaled $7.2 million, representing a 29% increase from the sequential third quarter, with CBD revenue rising by 271% on a sequential quarterly basis to $1.7 million. I know that doesn't sound like a lot in the way of sales, but remember that CBD-infused products bear juicy margins, and that Green Growth is still in the early stages of rolling out its storefronts to take advantage of CBD sales.
Having also recently resolved any near-term financing concerns with a bought-deal offering, investors appear willing to cut Green Growth Brands some slack as long as its high-margin CBD product growth continues.
Investors flocked to safer derivative plays
Aside from profitability, Wall Street and retail investors are also seeking out signs of predictability in a very unpredictable space. That's why MediPharm Labs and CV Sciences likely found buyers in October.
MediPharm has already landed a number of promising extraction contracts with major Canadian growers, including Cronos Group. What makes these contracts so attractive is that they're often for a period of 18 to 36 months. This ensures MediPharm will be generating relatively predictable cash flow, which also allows the company to moderate its costs and remain profitable. Despite beginning operations in November 2018, the company already turned a nominal per-share profit in the second quarter.
Something similar could be said for CV Sciences. Despite a somewhat checkered past that looks to be holding back its valuation a bit, the company is poised to benefit from growing demand for CBD products. In recent months, CV Sciences landed a retail distribution deal with Kroger spanning 1,350 stores in 22 states, as well as a more-than-500-store deal with Vitamin Shoppe.
Lastly, we may be seeing the first bit of value hunting in the marijuana space. KushCo, for instance, was the top-performing pot stock in October, with a gain of 35%. This follows a September that saw it deliver some of the worst returns among the five dozen weed stocks I follow.
KushCo has been hammered because of its reliance on vaporizers for a majority of the company's current sales. These vaporizers have been hit by tariffs associated with the U.S.-China trade war, and they're also a source of concern in the U.S., where the Centers for Disease Control and Prevention has 1,888 confirmed or probable cases of mystery lung illnesses caused by vaping over the past three months.
However, KushCo is now valued at less than one time next year's sales, and KushCo's management team has reaffirmed its 2019 sales guidance on a number of occasions. Although profitability is still a couple of years away, value seekers might be intrigued by KushCo's top-line growth and its numerous avenues to ancillary revenue.