Alexander Nachman, America’s leading expert on investing in the cannabis industry, commented on the quality of several cannabis stocks and their potential upside and risk.
I am continually asked about the current state of the market, as well as what cannabis stocks I find value in and what near term catalysts might spur profits in the cannabis sector.
When it comes to investing in the stock market, I believe in first preparing a fundamental analysis of the company’s business model. I effectively use quantitative modeling to isolate my investments throughout my career in the financial arena.
Looking at the Cannabis sector, I find several companies of interest with decent fundamentals, reasonable price points for current investment, and the positive potential near term events that could propel them higher. In my opinion the following 3 stocks merit consideration if you are looking to add exposure to the cannabis sector; plus one stock I would avoid.
I would consider going long the following stocks:
I would avoid:
- MassRoots (OTCMKTS:MSRT)
GW Pharmaceuticals is one of the strongest issues in the cannabis sector. They are a pharmaceutical company that specializes in cannabinoid prescription medicines. The fundamentals are intact showcasing a current ratio of 6.86. This is a great indicator of near term financial health and a number that I always look before even considering a company. Simply stated the current ratio = Current Assets/Current Liabilities
GWPH 6.86 current ratio denotes they have almost 7x the amount of cash and assets than they have bills, which is a very strong financial position. I will not buy a company unless they maintain a 2 or better in this category. Their book value is strong at $13.00 and represents a substantial $11.68 per share in cash. They have just over $27 million in revenues, which is an excellent start given the restricted sale of their products worldwide. They have two positive phase 3 clinical trials under their belt, and my expectation after a discussion with the company earlier in the week is that they will have further evidence of their products effectiveness in treating epilepsy patients with another set of phase three results due out at the end of the third quarter. At this point for me, there is no question that their product works, now it’s a matter of what is the best dosing protocol. They are positioned as the world leader in the space and have a 52 week high of approximately $126. I would feel comfortable accumulating the stock under $100, but preferably where it sits now in the low 90’s seemingly wanting to trend higher as it maintains a positive stance above the 50 day moving average. I anticipate that GWPW will head higher over the next few months as we escape the summer doldrums, their clinical trials hit the market, or on any other positive news. The beta is 3 so it can be a wild ride, so don’t get too emotionally attached if you are trading. Longer term I am also bullish on GWPH as it has a 5 year Peg Ratio of .46
Kush Bottles markets and sells packaging products and solutions for the medical and recreational cannabis industries. It offers pop top bottles; child resistant exit, paper exit, and foil barrier bags; tubes; to urban farmers, green house growers, and medical and recreational cannabis dispensaries. They are a leader in ancillary supplies and strategically positioned with locations in Colorado, Washington and California. Kush’s growth is solid and it is recognizing its third consecutive quarter of gross profitability. Revenues increased 94% year over year, and they revealed a 23% increase quarter over quarter for the period ending May 31, 2016. KSHB has current ratio is a 2.39 and with the high likely recreational legalization in California this November, I think 2017 is a break out year for the company. The stock was substantially higher in the last 52 weeks, sporting a top of 2.94, but it has been holding at its 50 day moving average and I think it’s a good entry point and worth accumulating in this range.
Zynerba Pharmaceuticals is another stock worth a look at these levels, currently trading in the low 7’s. The stock has a 52 week high of $43 in August of 2015 directly following an IPO at $14 with Jefferies LLC and Piper Jaffray & Co. acting as co-managers, and additional support from Canaccord Genuity Inc. and Oppenheimer & Co. Inc. participating in the offering as well. ZYNE is a specialty pharmaceutical company, focusing on developing and commercializing proprietary synthetic cannabinoid therapeutics formulated for transdermal delivery. Financially, I see a current ratio of 13.22. The number is so high because ZYNE is cash rich holding an impressive $4 per share in cash. Zynerba had positive results from their phase 1 clinical trial and is using that data to initiate a phase 2 trial. My thought is that any positive news from the company, as well as positive stories generated from competitors like GWPH, spells good news for investors. ZYNE has a limited number of shares outstanding at 9.2 million shares and about half that in the float. I have seen the stock move very fast when buy orders come because of a lack of availability of willing sellers. The stock is currently in the low 7’s and I believe can be accumulated at this price, with an exit point of $10-15 by the end of the 2016.
MassRoots is unlike the first three companies, which I see as a compelling value and opportunity. At this level MSRT is a company I would avoid in the near term. Their current ratio is a .56 which is not good. Intrinsically they have more liabilities than cash and assets, and a score of .56 basically immediately disqualifies them for me. Their first quarter results showed Revenues of 0.09 million and Net Earnings of -(2.64) million. I do not expect much from their second quarter results for the period ended June 30th 2016, due to be reported by the end of August. They are very low on cash and burning through it like a chainsaw through butter. I am unsure who will act as their white knight and come in with a large cash infusion since they missed their bid for NASDAQ uplisting. At this point, I believe that MassRoots would need a large cash infusion to remain viable. The changes in laws in California and other states may provide them with additional users, but I am very unsure if it won’t be too little too late to make a difference without some other favorable catalytic events for the company. I would not accumulate the stock at these levels, and if I owned it long in my portfolio I would consider restructuring, especially if I had a loss in the stock already as I believe you may have a chance to buy it substantially lower by the end of the year.
For more information on cannabis investing, contact Alexander Nachman, at www.alexandernachman.com
About Alexander Nachman:
Mr. Nachman is a 15-year Wall Street veteran known for his conservative approach and focus on fundamentals, but also with an eye toward catching emerging trends
Securities Disclosure: I, Alexander Nachman, hold no direct investment interest in any of the companies mentioned in this article and this article does not constitute a solicitation to buy or sell any security and is solely representative of my opinion
Cannabis Stock Market: www.thecannabisstockmarket.com