June 2019: Pot Stocks of the Month

Over the last month, we’ve seen roiling stock markets, Fed uncertainty, trade wars escalate and talks about impeachment dominate news cycles. But for one corner of the market, things got even crazier.

Cannabis, as an industry, has been one of the wildest (yet most compelling) investment areas for the past two years. It has truly been the premiere example of Wall Street’s fickleness. It’s peaks and valleys make the ’08-’09 financial crash look like a slight correction:

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As you can see by looking at this chart of the Alternative Harvest ETF (MJ), which represents most publicly-traded cannabis stocks, last year saw a wild ride. But 2019 hasn’t been a cruise for pot stocks.

The first quarter of this year saw a strong rebound from the industry after the devastating post-Canadian legalization freefall last October. But from the end of March until now, it hasn’t been so great.

Investors are at turns both fascinated and scared of this group of stocks. With the heightened political environment in the U.S. these days, cannabis has come under fire.

The passage of last year’s Farm Bill was the most progressive move so far by the U.S. federal government when it legalized the cultivation and sale of cannabidiol or CBD. But since then, the topic has moved to the FDA to regulate its use in other products, namely food, beverages, and health care products.

That’s starting to come to a head. Last week, the agency held its first major hearing on the subject. It invited more than 100 witnesses and speakers to discuss the pros and cons of the substance.

Since this was only an information-gathering session, no policy has been decided yet. But the tone of the agency members’ questions leaves no doubt: it is looking for proof of safety and efficacy in CBD.

This takes research… a lot of it. The average drug takes around a decade to go from idea to approval. So, it’s clear the FDA is not a swift-moving body. But just because we may be looking at a long period of analysis and trials doesn’t mean there’s a lack of profit to be made.

Not all companies in the field are strictly growers and distributors. This, as with all industries, has many different components. Medical marijuana is only one small portion of it. CBD too is broken down into growers, research firms, product developers, marketers, and distributors.

What we’re seeing here, with how the FDA is signaling its intent on what comes next, is a boom for the first two: growers (specifically those involved in hemp and CBD extraction) and researchers (those that will deal directly with the FDA to gain drug approvals.

That’s not to say others won’t benefit from this heightened attention on CBD. Certain states and countries will, of course, have their own rules regarding the non-psychotropic cannabis product. But right now, researchers, medical and drug developers, and their partners stand to benefit right away.

This is also a bit of a look at what we can expect if marijuana itself gains legalization. The FDA is likely to follow the same steps with THC as it is with CBD if that substance comes into its purview.

This is one area set for the most explosive and sustainable growth… at least in the short term. So, that’s where we head for this month’s “Pot Stocks of the Month.”

There are really only two companies worth looking at here. Each has its own market advantage and economic moat. And each is in the perfect place to take advantage of the new FDA directive.

Pot Stock of the Month No. 1: GW Pharmaceuticals plc (GWPH)

You can’t talk about the growth and potential of CBD drug development without talking about the top dog… the company that has already proven it is years ahead of everyone else.

In fact, this company has the only plant-derived drug approved by the FDA. That includes THC and CBD-based research.

GW Pharmaceuticals plc (GWPH) is a large company for this industry at $5.4 billion. Still, it is nowhere near the size of Canopy.

The reason is simple: it is a biotech with a platform that was only approved last year. It doesn’t have the kind of speculative stir its larger cannabis brethren have. That doesn’t mean it is unworthy of that attention.

Last November, its first (of likely many) CBD-based, FDA-approved drugs, Epidiolex came to market. This drug treats epilepsy in people (including children aged 2 and over) with Lennox-Gastaut and Dravet syndromes.

I won’t blame you if you aren’t acutely aware of those specific forms of the disorder. Only about 45,000 to 70,000 people have it out of the 3.4 million sufferers of epilepsy.

But to put it in perspective, the drug industry hasn’t come out with a new treatment for LGS since 2011. And it has never had a treatment approved for Dravet. This is a relatively small, yet largely untreated segment.

Again, to clarify the actual market for this new CBD-based treatment, consider that Epidioloex is really the only drug out there for it… and just 7,600 of these sufferers have even been introduced to GW’s product so far. Yet, sales of the drug have already brought in $33.5 million in just its first quarter.

There’s enormous potential here… not only in expanding coverage to the other 60,000-plus patients but geographical and disorder-type expansion.

Right now, Epidiolex is set to launch in the UK, France, Germany, Italy, and Spain this year. By next year, even more of Europe will open up as its own version of the FDA sets to greenlight it.

Beyond just expanding across borders, the use of the drug is set to explode. Right now, Epidiolex is in Phase 3 clinical trials for the treatment of Rett syndrome – a female birth abnormal neuronal development disorder affecting 10,000 – 15,000 people.

Epidiolex is also near an FDA decision for the use on sufferers of Tuberous Sclerosis Complex.

But GW is not a company to put all of its eggs in one basket. The company has several more drugs in the pipeline.

Sativex – another CBD-based drug – is working its way through Phase 3 trials for Multiple Sclerosis Spasticity. Outside of the U.S., this drug is already well beyond this stage, approved in more than 25 countries.

CBDV is another epilepsy treatment using CBD that GW Pharma is working on. It is being studied for the treatment of Autism Spectrum Disorder and epilepsy. This one is already in Phase 2 studies.

In short, this company has a robust pipeline, early sales success and FDA exclusivity for the only CBD-based drug already on the market. It has this exclusivity for the next seven years. In Europe, once all those i’s are dotted and t’s crossed, it will be the sole provider for 10 years.

Of course, just having the right formulas and first-to-market advantages would be meaningless if the underlying company wasn’t sound. Fortunately, GW has that covered too.

Despite working to push its cannabis-based drug development platform through approval for many years, it hasn’t been forced to take on any large amount of debts.

In fact, as of its most recent quarter ending this past March, GW Pharma was sitting on $522 million with only $25.9 million in debt. That’s a 20-1 cash-to-debt coverage ratio.

With such a footprint, pipeline and financial position, GW Pharma is clearly a place to put your cash right now.

If you’re looking to take advantage of the now-declared direction the FDA intends to head with CBD (and likely eventually THC), this is the play for you.

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Action to take: GW Pharmaceuticals plc (GWPH) is a strong buy in the CBD drug research industry.

Pot Stock of the Month No. 2: Emerald Health Therapeutics Inc. (EMHTF)

While GW Pharma has a large leg up in the U.S. already, that doesn’t mean others won’t try to elbow their way in. The problem is that dealing with the FDA, its regulations and processes are difficult and time-consuming.

There might be another way, however. Those looking to get in on this early action on the drug development side of the industry might be able to do so with a bit of money.

You see, the U.S. and Europe aren’t the only regions interested in cannabis from a pharmaceutical standpoint. In fact, another country has been way ahead of the game… namely, the one he has already opened up the industry for way more than medical.

Canada only recently passed its recreational use laws that went into effect last October. It was – and is – one of the premier medical marijuana research nations.

And with so much new interest in CBD, it too has taken advantage. Especially, Emerald Health Therapeutics Inc. (EMHTF).

Emerald is a crucial piece in the tough-to-navigate supply chain… specifically on the drug side. It owns and operates — both fully and through partnerships — a number of facilities that develop, grow and harvest hundreds of cannabis strains.

The company has a 50/50 partnership with Pure Sunfarms, a massive 1 million-plus sq. ft. greenhouse facility that yields 75,000 kg of cannabis at a minimum annually.

That’s just the start. The company is working on an expansion project that will double the production with another 1.1 million sq. ft. greenhouse to bring its production up to 150,000 kg of product.

But straight up product growth isn’t the only thing Emerald is interested in. It has a fully-owned facility in Quebec for development and production. While much smaller, this 88,000 sq. ft. the facility contains 12 processing and packaging rooms, 23 independent growing rooms and is currently growing 200 different strains of cannabis.

This is what sets Emerald above the rest. It is developing for the future of the industry. As the legal situation continues to evolve in many areas and distribution and marketing continue ramping up in Canada, Emerald will have the desired new types of product.

On top of these production facilities, it has lucrative partnerships with individual research groups to study these substances. It is also working on alternative THC related products, including THCA – a non-psychotropic substance that shows promising results in animals.

The company has so much going on, it’s nearly impossible to cover it all. But as for the reason it is a perfect “pot stock of the month” candidate, it is actively and aggressively growing its CBD business.

Just this year, the company contracted to buy over 500 acres worth of hemp chaff for CBD extraction. Next year, that should double to 1,000 acres.

This costs the company very little. But it does make it a key link in the supply chain. You see, no research can be done on the substance without a steady supply of it to study.

Hemp, which is the type of cannabis CBD comes from, isn’t nearly as high margin as the THC variety. So, growing it hasn’t become the boom segment of the industry many hope. But specializing in the next stages does make good money.

Emerald is already a foremost expert on the extraction and preparation for clinical studies of both CBD and THC.

This also gives way to the real opportunity. While Emerald is certainly set to do quite well by itself – with a solid balance sheet, strong top-line growth, and flourishing relationships – it offers another investment angle.

Emerald is a near perfect buyout target. While the company has limited exposure to the U.S., it has been dipping its toes into opening up exports of its products to the U.S.

But more importantly, the company already has production, proprietary strains and more than a dozen crucial patents for both regular CBD and THC extraction as well as those alternative areas that deal with a line of research called the Endocannabinoid System… basically the next giant step forward in this area.

Think what all of this could mean to a major player in the U.S. Imagine what this kind of setup could be worth to the likes of Pfizer or Merck… or even another cannabis player like Canopy Growth.

Now, consider that Emerald has a market cap of just $350 million – loose change for Big Pharma.

This is, especially after the recent direction the FDA has indicated, an exceptional find and one that won’t last forever.

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Action to take: Shares of Emerald Health Therapeutics Inc. (EMHTF) are a steal at today’s prices.

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