Article Summary

Cannabis-related stocks went on a tear during October, with speculators bidding up prices in advance of the expected passage of state recreational legalization efforts and the election of what was presumed to be a legalization moderate, Hillary Clinton. While the election results may prove mixed for the future of businesses engaged in legal recreational cannabis, the bigger near-term issue is that the sector may have gotten ahead of itself, with share price valuations soaring into “bubble” territory. Based on this alone, pot stocks are due for a retracement and pause, but the implications of a Trump presidency need to be considered as well.

The article is one of many I wrote for a stock trading news website during the 20-teens.  

Pot Stock Rally Stalls In Face of Election Results, Retracement Likely

President-Elect Trump’s Position Remains Unclear

Voters in four states passed state ballot initiatives in Tuesday’s national elections that will legalize the recreational use of marijuana in those respective states. The states of California, Massachusetts, Maine, and Nevada will now join four other states and the District of Columbia in allowing the legalized recreational use, sale, and consumption of marijuana. Voters in Arizona rejected a legalization measure, while three other states approved medical marijuana use, bringing the number of legal medical marijuana usage states to 28, with an additional 16 allowing various restricted forms of medical usage. 

U.S. stocks rallied the day after the election strongly, but many marijuana-related stocks fell. However, marijuana stocks climbed strongly with high volumes in the month preceding the election, with investors betting that the election results would benefit companies involved with cannabis. In fact, the Marijuana Index, which selectively tracks 23 U.S. and Canadian companies focused on the legal marijuana market, doubled during the month. The index gained 0.6 percent on the day, mainly due to the strength of its two largest market-cap stocks, with nine index stocks posting declines of more than 5 percent. 

While most declines are likely due to profit-taking after the October run-up, there may also be concern about the election of Donald Trump, along with Republican control of the House and Senate, a party not traditionally seen as friendly to marijuana legalization. The legal status of cannabis in America is complicated by a regulatory regime with competing state and federal overlap and ongoing federal indecision on how to appropriately follow its own laws. Under federal law, marijuana is classified under the Controlled Substances Act as a Schedule I drug, which is defined as a substance with no accepted medical use and a high potential for abuse. 

The Obama Administration has opted not to interfere with states that have legalized the drug, but investors have no way of knowing how Trump and a Republican Congress may decide to address federal marijuana laws in relation to contrary laws established by states. Trump does not have a written position on legal marijuana, but has been quoted as saying that both recreational and medical marijuana should be addressed at the state level. Nevertheless, reasserting federal government legal oversight and enforcement in pot-legal states would only take an executive order to the Justice Department, with such a move likely resulting in sharp declines for cannabis stocks.

How Should Cannabis Investors React? 

So, what’s a pot-minded stock trader to do? 

Buy? Sell? Hold? Short? 

Roll a spliff and see if the Ganja Gods offer a tip? 

It’s a tough one, and while Traders News Source can’t claim to have the answer, we do have an opinion. We can point out that with the addition of new legalized states, legal marijuana is projected to be a $20 billion-per-year business by 2020, a significant gain from the estimated $5.6 billion in 2015. We’ll note further that one might think numbers like that would appeal to Trump’s business pragmatism, but that would be pure conjecture. And while we can say that the following cannabis-based companies are likely poised for continued growth should the regulatory regime remain stable under the incoming administration, their stock prices have seen sizable run-ups in the past year and are probably more poised for a near-term sell-off and flattening than a continued rally. 

After Powerful Run-Up, Cannabis Sativa Likely to Face Near-Term Declines     

Speaking of run-ups, Cannabis Sativa Inc. (OTC: CBDS) has seen its share price rise more than 865 percent in the past year, from lows below 50 cents to recent highs above $8 (the share price fell more than $1 yesterday, closing at $6.38). Through its subsidiaries, CBDS develops, manufactures, and markets herbal-based skin care products across the U.S. and internationally, and researches, develops, and licenses natural cannabis products comprised of cannabis formulations, edibles, topicals, strains, recipes, and delivery systems. Included in the company’s mission statement is to “shape the future of legal marijuana, brand and market the highest quality cannabis products available today—and to innovate the future of casual cannabis.” 

Under its “Hi Brands International” subsidiary, the company opened its first branded marijuana dispensary in Oregon in 2015. Former CEO Gary Johnson, who just ran as the Libertarian candidate for president, said that Cannabis Sativa is “poised to dominate the [cannabis] industry with the ‘Hi’ brand the way Apple leads the electronics and smartphone space.” While that may currently seem a stretch, the company has actively sought legitimacy for both itself and legal marijuana by filling its board and executives with legal professionals, including a former U.S. senator, a former state judge, and a former commander of the Los Angeles Police Department’s narcotics enforcement program, among others. 

While the company has reported year-over-year revenue growth of about 20% over the past three years, as well as declining net losses, the revenues (about $50,000 in the last quarter) are underwhelming at best. Bottom line is that it’s going to take a lot more revenue growth to justify the stock’s current market cap north of $100 million, and we would guess the stock price is poised for further near-term declines.

CannaGrow Holdings’ Positive Earnings Don’t Justify Market Cap   

CannaGrow Holdings Inc. (OTC: CGRW) is another high flyer that, with an almost 300 percent share price surge over the past year, has also soared too high, especially when considering that annual revenues seem to be range-bound between $340,000 and $420,000. While the company is one of the few in the pot sector with positive earnings, it may not justify the plus-$200 million market cap. 

The company serves as a lessor, liaison, and consultant to licensed cannabis growers in Colorado, providing turnkey setup of growing facilities. With the legal cannabis industry on fire in Colorado, the company is undoubtedly well-positioned for future growth. However, like most pot stock share prices, there needs to be some retracement and then a healthy pause, not to mention an improvement in revenue growth, before the share price can ascend again.

America Cannabis Co. Expressing Healthy Growth 

Similar to CGRW, America Cannabis Company Inc. (OTC: AMMJ) assists businesses and cultivators with all details of establishing and operating their cannabis enterprises. The company also sells products and equipment used in marijuana cultivation. Based in Colorado, the company is also well-positioned for future growth, especially given the expansion of its consulting reach into six other states. 

Founded in 2013, CGRW has seen its share price rise more than 1,300 percent over the past year, from a low below 10 cents to a recent $2. Quarterly revenue growth has been in slight decline over the past 12 months, but has seen healthy growth since the company’s founding.

Two Others Facing Likely Retracement 

Another Colorado operation, General Cannabis Corp. (OTC: CANN), also provides consulting services and has posted a plus-300 percent gain in its share price over the past year, with a recent high of $5.19 eclipsing the low of 32 cents. Among Colorado-based consulting cannabis companies, CANN appears to have the highest revenue growth rate. Nevertheless, like the others, its share price climbed too high, too fast, and is likely due for retracement and a pause.

United Cannabis Corporation (OTC: CNAB) serves as a cannabis consultant and owns intellectual property relating to the legalized growth, production, manufacture, marketing, management, utilization, and distribution of legal marijuana and cannabis-infused products. As its story is similar to those of the other cannabis consulting companies profiled here, its intellectual property in medical cannabis may give it a leg up on the competition. Founded in 1999 to investigate potential medical uses for marijuana, the company also possesses a deep institutional knowledge of the cannabis sector, both recreational and medical. 

Miracle-Gro a Safe Play

The last position on our list, The Scotts Miracle-Gro Company (NYSE: SMG), hit all-time highs on Wednesday, with some analysts attributing the move to voter-approved state legalization measures. The stock price breached $91.60 during the day, after climbing 34 percent over the past six months, largely due to the company’s entry into the sale of hydroponic equipment for cannabis cultivation. The company’s marijuana-based boom may not last, but as a long-term manufacturer and marketer of consumer lawn and garden products, with $5.4 billion market cap and a dividend yield of 2.26 percent, the stock is undoubtedly a safe long-term play.