The Bottom Is in for Cannabis Stocks
Today, we’re going to talk pot, marijuana … the “devil’s lettuce,” as my brother-in-law likes to call it.
Specifically, we’re talking about the No. 2 Canadian cannabis company, Aurora Cannabis Inc. (NYSE: ACB). Over the weekend, Great Stuff reader Gary B. asked:
Back on August 6, Great Stuff recommended buying ACB’s shares. The recommendation has not been “great stuff,” so to speak. There are many factors for ACB’s underperformance — and the Canadian cannabis market in general. The thing is, the biggest concerns are unrelated to Aurora Cannabis.
First and foremost is the mysterious vaping disease that has been tied to cannabis usage. This disease has killed about 33 people so far and sickened more than 1,400, according to the Centers for Disease Control and Prevention.
Pretty scary, right? But this disease has nothing at all to do with Aurora. Heck, Aurora can’t even make or sell cannabis vaping products until December. That’s when Canada will roll out Cannabis 2.0, which legalizes edibles, vapes, infused beverages and other products.
In fact, this disease has been tied directly to illegal black-market products. Sadly, that fact hasn’t stopped sentiment from souring considerably on the cannabis market as a whole.
The second issue is the biggest problem facing Aurora, and it’s largely a new-market issue. New markets don’t just spring up overnight … especially those that require brick-and-mortar locations to facilitate sales.
A good example is a recent statement by The Green Organic Dutchman Holdings Ltd. (OTC: TGODF): “With the current Canadian legal market being smaller than initially anticipated, mainly due to a slow rollout of retail locations in key provinces…”
The statement came after Green Organic said it was cutting costs and reducing financing needs. Most of the financial media have focused on the Canadian market being “smaller than initially anticipated,” and that has added to the recent sell-off.
However, the second part of that statement — “mainly due to a slow rollout of retail locations in key provinces” — is being completely glossed over. Green Organic isn’t saying that demand is lower than expected. It’s saying that distribution channels are not adequate.
Demand is still there, and it’s still strong. But legal cannabis producers are battling an entrenched illegal market, and this slow rollout of retail locations is only hindering legal progress.
If you want more proof of this, see today’s Chart of the Week below.
To Gary B. and other Great Stuff readers, I want to say one thing: Stay the course.
Aurora is a solid cannabis company that hasn’t needed a big backer to rise to the No. 2 spot. That speaks volumes for Aurora’s management. You know what else speaks volumes? The fact that Aurora ditched its investment in struggling Green Organic before it was too late.
Aurora continues to expand overseas sales, push hard in the Canadian market and prepare for eventual legalization in the U.S. Once Cannabis 2.0 rolls around in December, this mysterious vaping disease could begin to fade as safe legal products become available.
Great Stuff’s Aurora recommendation is a long-term play based on the growing global cannabis legalization movement. This short-term, sentiment-based sell-off is a bump in the road.
Is it a big bump? Yes, unfortunately. But staying the course will pay out big rewards in the end.
Right now, ACB is heavily oversold. It will rebound soon. Have faith. And if you have room to buy more, do so.
That said, Gary, as far as continuing to add to your ACB holdings on the way down … I can only say that you should never put more than 20% of your portfolio in any one position. ACB is going to make Great Stuff readers a lot of money, but you still need to diversify to avoid unforeseen incidents like this vaping disease issue.
Invest responsibly, and you won’t regret it.
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The Good: Positive Genetics
Breast cancer affects one in eight U.S. women … some of my family members among them. It’s the second leading cause of cancer death in women. It’s no laughing matter … so no jokes in this section. (Heck, I feel a little guilty just telling you how to profit from this disease.)
Seattle Genetics Inc. (Nasdaq: SGEN) has had a breakthrough. The company just announced positive trial results for one of the most aggressive forms of breast cancer: metastatic HER2-positive. HER2-positive accounts for 15% to 20% of all cases worldwide, and it was once a death sentence if diagnosed.
But recent advances have improved the chances of survival and treatment … and Seattle Genetics hopes to take that one step further. In the trial, the new drug tucatinib was tested in combination with trastuzumab and capecitabine (two other breast cancer treatments). The trial met both its primary endpoint of progression-free survival as well as its secondary endpoints.
Seattle Genetics is now submitting a new drug application (NDA) with the Food and Drug Administration in the first quarter of 2020.
SGEN’s shares soared more than 14% on the news and should climb even higher if the NDA is approved.
The Bad: Blowing Whistles
It’s the year of the whistleblower, and “whistleblower complaint” is the last thing any investor wants to hear right now.
But that’s exactly where Infosys Ltd. (NYSE: INFY) investors find themselves today. In a letter to both Infosys’ board and the U.S. Securities and Exchange Commission, an anonymous group detailed “unethical” accounting methods at the company. Those methods were designed to improve short-term revenue and profit, the letter details.
“In large contracts like Verizon, Intel, JVs in Japan, ABN AMRO acquisition, revenue recognition matters are forced, which are not as per accounting standards,” The Economic Times reported, citing the anonymous letters.
The irony is that the complaint citing unethical moves to boost short-term revenue and profit comes just after Infosys reported strong quarterly earnings results. The whistleblower complaint now casts a shadow over those results.
As a result, INFY’s shares have plunged more than 14%, erasing all of the stock’s gains for the past year. The shares are now oversold and could see a short-term bump on that fact alone. However, investors should be wary of INFY until this matter is fully resolved.
The Ugly: “I Suck at Flying”
It was a close race for “The Ugly” today … OK, no it wasn’t. While the Infosys whistleblower scandal is bad, it lacks key catchphrases such as “I suck at flying” and “Jedi mind-tricking regulators into accepting training.”
Yes, dear readers, The Boeing Co. (NYSE: BA) saga continues with “Revenue of the Transcripts.” In a report over the weekend, transcripts emerged from a lead Boeing pilot who complained about the 737 Max’s flight-control systems.
In part of the transcripts from 2016, Mark Forkner, the company’s former chief technical pilot for the 737, said: “Granted, I suck at flying, but even this was egregious.”
This exchange led to Forkner saying he unknowingly lied to regulators and that he was “Jedi mind-tricking regulators into accepting the training that [he] got accepted by FAA etc.”
To say that the Federal Aviation Administration (FAA) is not happy that Boeing witheld these transcripts from regulators is an understatement.
And that’s not all. UBS cited the reports in its downgrade of BA’s shares. The brokerage cut BA to neutral from buy, slashing its price target to $375 from $470.
It looks like Boeing won’t be able to bull’s-eye womp rats in Beggar’s Canyon with its 737 Max anytime soon.
So, cannabis is legal in Canada, but the distribution supply chain is woefully not up to speed. What’s a pot smoker to do?
According to today’s Chart of the Week, you continue to get your weed from your illegal supplier:
According to a survey of 6,466 Canadian respondents, 41.9% still get their cannabis fix from illegal suppliers. I think it’s safe to say that Green Organic Dutchman hit it on the nose with its comment about “a slow rollout of retail locations in key provinces.”
What’s also interesting is that 37% of respondents still get their pot from “friends or family.” Unless those friends or family grow their own or buy legally and resell to family, you can bet this is illegal activity too.
What I want to stress here — especially for Aurora Cannabis investors — is that the demand is there. There are literally billions of untapped dollars just waiting for key retail locations to pop up … and that’s just in the Canadian market.
It will take some time to ramp up, but the growth will come … and with it, profits!
Great Stuff: The “Price-to-Stoner Ratio” Updated!
Anthony Planas, Banyan Hill’s very own pot stock guru, had an important update last week.
Did you miss it?
That just won’t do. You see, Anthony just updated the Green Flag Index — aka the “price-to-stoner ratio.” (I don’t think Anthony likes me calling it that, but oh well…)
Great Stuff first reviewed this index on May 28 and did a follow-up review on August 2. Basically, the price-to-stoner ratio weeds out pot companies by ranking them based on their enterprise-value-to-production ratios.
Put simply, it shows you which cannabis companies can deliver the goods their higher market values may imply.
To find out more about Anthony’s updated Green Flag Index, read his recent article: “Pot Company Earnings Reports for 2019 Are in — What You Need to Know.”
(On a side note, you’ll see that the top two cannabis stocks in the Green Flag Index are Great Stuff recommendations.)
Or, if you’re partaking, don’t feel like reading or just want to hear Anthony’s dulcet tones extol the virtues of pot investing, watch the video below:
Finally, for the latest and greatest on which five cannabis stocks are hitting their “acceleration phase,” you need to click here now!
(Don’t wait! These pot stocks are going to seriously take off. Go click that link!)
Until next time, good trading!
Great Stuff Managing Editor, Banyan Hill Publishing