NEW YORK, October 30, 2018 /PRNewswire/ --
CannabisNewsWire Editorial Coverage
Following a tumultuous month, cannabis continues to carve its own path rather than following the lead of other stocks.
- As the stock market plummeted earlier this month, cannabis companies stayed strong, buoyed up by legislative changes in Canada.
- The cannabis market appears set for continuing growth as it expands into expected sales worth billions of dollars across North America.
- While it still faces regulatory challenges in some locations, this market sector is preparing for corporate big players to move in.
Companies with varied interests are moving into the cannabis sector, such as lifestyle business Youngevity International, Inc. (NASDAQ:YGYI) (YGYI Profile). While the stocks of some cannabis players such as Tilray, Inc. (NASDAQ:TLRY) appear overvalued, this reflects problems with valuation tools more than the stocks themselves. The sector has developed its own heavy hitters, such as Canopy Growth Corp. (NYSE:CGC) (TSX:WEED), whose millions of square feet of growing space are now leading to sales into the United States as well as Canada. Some companies are focused only on medical products, such as GW Pharmaceuticals Plc (NASDAQ:GWPH) with its cannabis-based prescription medicines. But it's the recreational side of the cannabis space that has drawn in Constellation Brands Inc. (NYSE:STZ), a huge beverage maker that has invested $4 billion in a cannabis cultivator.
To view an infographic of this editorial, click here.
Cannabis Stocks Versus the Market
It's been an interesting month for cannabis stocks.
Three weeks ago, cannabis looked like a particularly strong bet. As the wider stock market fell, cannabis stayed strong. Some cannabis stocks even saw significant rises in value amid promising developments from those companies. Legalization in Canada undoubtedly played a part in their success, with the run-up to Oct. 17 seeing predictions of massive profits for cannabis companies. But some commentators argued that it was part of a bigger trend in which cannabis stocks are among those that don't follow other market indicators.
Then came the week following legalization and a notable fall in the value of cannabis shares. The hype around these companies was punctured by market shifts. Had they fallen in line with the rest of the market? Was the reality of Canadian legalization catching up with the imagined utopia? Or was this simply a downturn for a sector trending separately from competitors?
More to the Market
To understand shifts in cannabis shares, one needs to take a look at the state of the industry.
The cannabis industry isn't self-contained. The spread of legalization and the emergence of derivative products has created a diverse sector combining exciting startups with older companies dipping their toes in a novel market. Alongside the pure-play cannabis brands, there are pharmaceutical businesses and even lifestyle companies such as Youngevity International, Inc. (NASDAQ:YGYI).
These companies are selling three distinct products.
First, there's medical cannabis. Supplied on prescription to deal with pain and nausea, cannabis' medical properties remain hotly debated but that hasn't stopped the state-legalized use of it from spreading across more than half of the United States.
In material terms, recreational cannabis has exactly the same chemical makeup as some of the medicinal products. What's primarily different is the way that it's marketed, sold and used. This is cannabis used for fun and relaxation. It's now available by law in nine U.S. states and Canada.
Then there are the derivative products. Most, including those sold by Youngevity, use cannabidiol (CBD). Cannabidiol is an active ingredient that doesn't get users high. CBD can be extracted from cannabis, both from the marijuana plant as well as its tetrahydrocannabinol (THC)-free variety known as industrial hemp. Research into CBD is still in its infancy, but it is already used in a wide range of health and wellness products.
Over the past 20 years, cannabis has grown from a black market drug to a major public market product in North America, with growing influence in the rest of the world. From the first stirrings of a medical market to the current state of affairs in which a G8 country has a recreational market and the White House is hinting at U.S. reforms, it's been a fast ride. As a result, there's still a lot of uncertainty about cannabis' destiny.
Where Now for Cannabis Shares?
The idea that weed doesn't correlate to other stocks seems to have some truth. This was shown by the events of early to mid-October, when legal reform and individual brand announcements set it on an opposite trend from other shares. While the Dow has headed towards its worst month since May 2010, cannabis stocks have carved their own path. It looked like good news for companies such as Youngevity.
For now, cannabis is offering a real challenge for traders. Cannabis stocks look overvalued based on traditional valuation metrics such as price-to-book ratio, price-to-earnings ratio or price-to-sales ratio. But these metrics are based on past results, not future valuations. Given ongoing changes, the future performance of cannabis companies will be nothing like the past. Whole new customer bases are opening up, bringing staggering potential for growth.
In the next month, there will be votes on whether to allow recreational cannabis in North Dakota and Michigan, at least one of which is likely to pass. North of the border, Canada is planning to legalize cannabis-infused edibles next year. That means a whole new sector of profit opportunities.
Then there's the impending arrival of big players in the market. Big pharmaceutical and consumables companies haven't paid much attention to cannabis yet, as its value is relatively low compared with their existing revenues. But with the market expanding, both groups may get involved - beverage and tobacco companies pursuing a natural spin-off from their existing businesses and big pharma in pursuit of new medicines. Those are moves that will bring disruption unrelated to wider markets.
As a lifestyle brand selling both coffee and cannabis derivatives, Youngevity has already placed itself to enter this cross-over market. And with its new HempFX™ line now available online, it's moving fast to profit from changes in the cannabis market.
Alongside medical and recreational marijuana, CBD is seeing huge growth. Youngevity CEO Steve Wallach has spoken about the huge potential of CBD products in direct sales channels, not just in America but around the world. His company is riding high on this trend with the announcement of new CBD products.
Youngevity's first offering in the CB market is the HempFX™ product line, a trio of three different hemp-derived cannabidiol oil products that contain organically grown products in proprietary formulas designed for a variety of everyday use.
The products include Soothe™, a blend of botanicals designed to relieve muscles by calming aches and pains; Uplift™, which combines CBD with St. John's Wort to improve cognitive performance and mood; and Relax™, which combines CBD with a variety of herbs and melatonin to bring relaxation and a better night's sleep.
Cannabis' Long-Term Prospects
The signs remain good for cannabis companies. One study predicts that sales in Canada could reach $7.1 billion in 2019, $4.3 billion of that coming from the recreational market.
The boss of cannabis company Tilray, Inc. (NASDAQ:TLRY) believes that the market in the United States will soon be worth $150 billion. A leading player in the medical cannabis market, Tilray has established agreements with Canadian partners that will let it profit from changes in that country, changes that could radically improve its earnings.
Other companies are also making significant movements in the market. Drinks giant Constellation Brands, Inc. (NYSE:STZ) has invested $4 billion in Canopy Growth Corp. (NYSE:CGC) (TSX:WEED), showing that it is serious about moving into the cannabis market. Canopy Growth is one of Canada's largest cannabis companies, with 5.6 million square feet of growing space. Like Tilray, it's looking at the wider North American picture and carried out a legal transfer of cannabis to the United States, the first such transfer with a Drug Enforcement Administration (DEA)-issued permit.
Canopy Growth's strong performance has drawn the attention of companies outside the cannabis sector, leading to the headline-making investment from Constellation Brands earlier this year. Many commentators have talked about this as a chance for Constellation to produce cannabis-infused beverages, a largely untapped market likely to take off once new rules come in Canada next year. But it may represent a broader play, as alcohol and tobacco companies aim to take control of cannabis and fill the gaps as sales of their existing lines fall.
Some companies are focused only on the medical market. GW Pharmaceuticals Plc (NASDAQ: GWPH) has created the first Food and Drug Administration (FDA)-approved cannabis-based prescription medicine as part of its substantial research and design program. Even as the recreational market and CBD steal its thunder, the medical market remains strong.
Clearly, there are still big uncertainties for the cannabis market. Questions about regulation and how far legalization will spread hang over everybody's heads. Yet companies are thriving despite this, showing the rewards that so often come with risk and innovation.
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