Michael Berger is a leading expert on the cannabis sector, a market that is just in its early stages of development. Here, the Associate Editor of MoneyShow.com highlights five of the most popular cannabis stocks and discusses the risks and opportunities in this rapidly developing but controversial sector.
Investors rarely have the opportunity to get in on the ground on floor of an industry poised to see incremental revenue growth for decades to come.
Although the opportunity is significant, investors need to be selective with publicly traded cannabis companies and they should focus on companies that are executing on their business initiatives. When it comes to long-term investments in the cannabis industry, there are only a few opportunities that we see.
The companies that fall in this category possess the following traits: 1) trade on a national exchange, 2) have a characteristic that gives them a competitive advantage or own its intellectual property, 3) are well capitalized, 4) offer a product or service that is difficult to replicate, 5) have ample capital to execute on organic and inorganic growth initiatives, and 6) are led by a management team with a proven track record.
FINRA and SEC warns investors about investing in marijuana stocks
On August 20, 2013, the Financial Industry Regulatory Authority (FINRA) issued an investor alert warning investors about potential scams associated with marijuana-related stocks. FINRA provided investors with advice that pertained to investing in marijuana stocks. Here is a summary of that advice:
- Consider the source. Be skeptical about companies that issue multiple press releases and promotions over a short period of time. The objective may be to pump up the stock price. Likewise, be wary of information that only focuses on a stock's upside with no mention of risk.
- Do your research. Search the names of key corporate officials and major stakeholders, as well as the company itself.
- Know where the stock trades. The OTC exchange has very loose regulation and reporting requirements. It is always better to invest in a company that trades on a national exchange like the NASDAQ or NYSE.
- Read a company's SEC filings, if available. Most public companies file reports with the Securities and Exchange Commission (SEC). Not all financial information filed with the SEC, or published elsewhere, however, is independently audited. Unaudited financials are just that—not reviewed by an independent third party.
- Be wary of frequent changes to a company's name or business focus. Name changes and the potential for manipulation often go hand in hand.
Tip for Investing in Cannabis Stocks
When it comes to investing, and in particular in marijuana stocks, there are two main rules that we recommend you follow:
- Be Selective: This is important because a lot of these companies are not as strong as they present themselves to be. If it seems too good to be true, it is most likely that.
- Timing is Everything: Cannabis stocks do not trade like your typical stocks. They are extremely volatile and trade in an irrational manner. Do not chase stocks that are already up a significant amount because they are probably overvalued.
2016 has been a year to remember for the cannabis sector and we are not even at the midway point yet. We want to highlight five cannabis stocks that have consistently appeared on our radar screen this year.
We encourage you to do your own due diligence and research the stocks featured in this article before investing in them. Read through this carefully as we highlight stocks we recommend, as well as stocks we think you should avoid.
1. Terra Tech Corp
Terra Tech Corp. (TRTC) has been one of the top performing cannabis stocks during 2016 (up 367% YTD). Terra Tech is a vertically integrated cannabis-focused agricultural company focused on cultivating and providing high quality medical cannabis and related products.
Through its five subsidiaries, TRTC is levered to several rapidly growing sectors of the cannabis industry and the company continues to increase its market share through organic and inorganic growth initiatives.
Terra Tech is focused on agricultural technology through its GrowOp Technology subsidiary; hydroponic produce through its Edible Garden subsidiary; dispensaries in Nevada/Las Vegas through its MediFarm subsidiary; cannabis products through its IVXX subsidiary; and California’s marijuana industry through the acquisition of the Black Oak Gallery and its assets.
Although TRTC has been one of the top performers in the cannabis sector, the shares recently came down from its highs. During the last week, TRTC fell approximately 25% and the stock’s momentum is no longer in overbought territory.
Volume Helps Tell the Terra Tech’s Story
One of the metrics we watch closely with all stocks is volume. Volume plays a significant role in a stock’s price movements, especially cannabis stocks.
During the last three months, Terra Tech’s share price has rallied 210% while average volume increased by 208% (compared average volume over the last three months to the average volume during the last week).
During the last month, price and volume as well have moved similarly. TRTC rallied 35.5% while volume increased by 48.5%.
Volume plays a major role for the liquidity of a stock and it helps investors enter and exit positions. Strong volume also helps narrow the spread of stock which helps improve an investor’s return.
Insiders Continue to Sell Stock
Company insiders have sold $950,000 worth of Terra Tech stock during April and this is something that we are monitoring closely.
Although we do not think it looks good when insiders (especially executives) sell stock, most of these insiders have been with the company since the beginning and they do not receive huge salaries. The recent rally created a good opportunity for insiders to bring in capital and we will monitor this trend going forward.
On the Sidelines…For Now
We are currently on the sidelines with TRTC but we are favorable on the company’s recent developments. While we are favorable on the company’s opportunity, we are not completely sold on its ability to be a successful public company because 2015 financial results show a $46 million accumulated deficit.
At the time of this disclosure, TRTC had a working capital deficit of approximately $523,600 and a cash balance of approximately $418,000. The company expects that its existing and available capital resources will be sufficient to satisfy needs through the third quarter of 2016.
Less than a month ago, Terra Tech announced plans to raise up to $75 million through the sale of stock, options, warrants, and other securities. We do not expect to see the company raise even half of the $75 million and we expect this raise to be dilutive to current shareholders.
Register for Technical420.com to keep up to date with outlook with shares of TRTC.
2. MassRoots Inc.
MassRoots Inc. (MSRT) the “Facebook of the marijuana industry” saw an extremely volatile week of trading and its performance looked similar to a roller coaster. The shares have fallen 38% from their April high ($1.67) and the shares are down 6.3% during 2016.
During the last week, MSRT fell more than 30% and momentum is approaching oversold territory. Last week’s weakness caused the shares to break below its 20, 50, and 150-day moving averages and we continue to monitor MSRT closely.
While we think this volatility is concerning, we remain favorable on the shares and would continue to be buyers on weakness.
Last weekend, there was a massive snowstorm in Denver which resulted in the cancellation of the 420 Rally. MassRoots was one of the organizers of this event and while it would have been a great opportunity for the company, safety comes first.
Volume Indicates Buy Opportunity
On Thursday, MSRT saw heavy weakness off of the open and its shares plummeted 40% (traded as low as $0.75). We noticed that this weakness was coming off of very light volume and we sent out a text alert to Technical420 members and told them to buy shares at $0.76. After the shares found a bottom, MSRT quickly rallied and shares ended the day at $1.09.
In the Terra Tech update, we briefly discussed the importance of volume when it comes to investing and trading. Volume is a leading indicator for share price. When a stock falls a lot on light volume, it can create a great opportunity for investors.
A stock’s volume can tell you a lot about a stock. When it comes to MassRoots, the company’s volume tells a very interesting story. Last week, MSRT traded more than 387,000 shares per day. This is 230% higher than the company’s average volume over the last three months (61% higher than average monthly volume).
MassRoots has traded more than 140,000 shares for the last 10 consecutive days and the company recorded its highest volume ever during this time (1,610,193 shares on April 11th). To put this in perspective, from February 3rd to March 22nd, MassRoots did not once trade over 100,000 shares.
Higher Volume is a Result of Warrant Execution
We attribute the recent increase in volume to the execution of warrants outstanding. When MassRoots filed its earnings report for the year that ended on December 31, 2015, the company reported the following warrants outstanding:
- 146,200 warrants outstanding and exercisable at $1.06 per share
- 761,000 warrants outstanding and exercisable at $1.00 per share
- 175,000 warrants outstanding and exercisable at $0.90 per share
- 50,000 warrants outstanding and exercisable at $0.60 per share
- 100,000 warrants outstanding and exercisable at $0.50 per share
- 3,415,275 warrants outstanding and exercisable at $0.40 per share
- 3,963,659 warrants outstanding and exercisable at $0.001 per share
At the time of this report, the aggregate intrinsic value of outstanding warrants was $6,857,509, based on warrants with an exercise price of less than $1.10 as of December 31, 2015.
Shorting: Easier Said than Done
Although MassRoots has a lot of supporters in the cannabis industry it also has a lot of people that hate the stock.
After MassRoots filed its S-1 Registration Statement, many cannabis stock analysts started talking about how the company will not be approved because it does not have enough capital to meet requirements. After shares dipped last week, some cannabis stock analysts started saying that they called MSRT as a short and encouraged people to short the stock.
It is not easy to short a cannabis stock. It is especially tough to short a cannabis stock that has a small float. MassRoots has a very small float, less than 14 million shares.
Consider the Source
One thing that the cannabis sector lacks are qualified stock analysts. There are few but not many. The sector is actually filled with stock promoters who favor certain stocks because they are either being paid to favor that stock or hold a lot of restricted shares of that stock because they were paid.
While we believe the road to success will not be easy for MassRoots, the company was one of the few to do things the right way. They were the first United States OTC cannabis stock to go public through an S-1, not a reverse merger.
We expect MSRT to hear back from the Nasdaq Capital Markets in the near future and this will be a major milestone for not only the company, but the entire cannabis industry!
Register for Technical420.com to keep up to date with outlook with shares of MSRT.
3. Pineapple Express Inc.
Pineapple Express Inc. (PNPL) operates through its Better Business Consultants subsidiary, which provides capital to canna-businesses, leases properties to those businesses, and offers consulting services and innovative product solutions.
Pineapple Express wants to create a nationally branded chain of cannabis retail stores under the Pineapple Express name. The company’s patent-pending Top-Shelf display safe system converts four critical components of the current dispensary model and combines them into one unit. Its display safe system allows for a dispensary operator to display product, secure all product in an armored safe, weigh all product in real-time, and dispense the product using an integrated point-of-sale system.
PNPL has been one of the best performing stocks during 2016 and shares are up more than 520% YTD. The shares have fallen more than 75% from their high on March 31st (traded as high as $42.38) and PNPL is trading at $10.47.
Receives Skull and Crossbones Symbol from the OTC
We have been on the sidelines with PNPL as this rally was fueled by no specific news and occurred on light volume. On April 4th, Pineapple Express received a skull and crossbones symbol (also known as a Caveat Emptor) from the OTC markets due to the recent increase in trading activity.
After it received this symbol, management said that it decided to limit its press releases and corporate communications until the symbol was removed. At that time, the company said it intends to file a Form 10 with the SEC to initiate the process of becoming a fully reporting company, which they expect to be filed within the next 30 days.
PNPL fell more than 52% last week and we remain cautious with shares. During the recent sell-off, volume increased and it was primarily comprised of sellers. Although volume increased, it still remains relatively light and we will continue to monitor this trend.
New Face for the Same Shell
Before the company changed its name to Pineapple Express, the company went by other names. Its previous names were Helixsphere Technologies, Inc., New China Global Inc., and Globestar Industries.
Since, the emergence of the cannabis industry has created opportunities for fraudsters, investors need to do their due diligence before investing in a cannabis company. Investors need to evaluate the source of information before acting on it.
Register for Technical420.com to keep up to date with outlook with shares of PNPL.
4. Canopy Growth Corporation
Last week, Canada’s Health Minister announced that Canada would legalize recreational cannabis in Spring 2017 at the United Nations General Assembly special session in New York City.
This announcement has served as a catalyst for the publicly traded licensed cannabis producers and we want to highlight the recent developments at our favorite publicly traded licensed producer in Canada, Canopy Growth Corporation (CGC.V) (TWMJF).
Canopy Growth produces and sells medical cannabis in Canada through its subsidiaries. The company acquired the second largest licensed cannabis producer in Canada during 2015 and has the largest market share of the country’s legal cannabis market.
Successfully Raises over $11 Million
Last week, the company closed its previously announced short form prospectus offering on a bought deal basis, including the exercise in full of the underwriters' over-allotment option. CGC raised $11,505,750 after 5,002,500 common shares were sold at $2.30 per share.
Canopy plans to use the proceeds to expand its cannabis oil extraction capacity at Tweed Inc., to add grow rooms, to invest in information technology and to develop international business opportunities. The balance of the net proceeds will be used for general working capital purposes including salaries, general maintenance, utilities, costs of compliance with Health Canada and other regulatory compliance and for the company's costs associated with client acquisition.
Earnings Show Continued Growth
In late February, Canopy Growth filed its earnings report for the quarter that ended on December 31, 2015. During the quarter, the company generated $3.5 million in revenue but recorded a $2.6 million net loss.
Canopy Growth has seen significant revenue growth since Canada legalized medical cannabis and we expect to see the company continue to grow at rapid rates. As of December 31, 2015, Canopy had more than 8,200 registered patients (1,800 as of December 31, 2014).
We remain favorable on CGC.V and TWMJF and we continue to monitor price movements for an opportunity to add to Technical420’s position in its Mock Portfolio.
Register for Technical420.com to keep up to date with outlook with shares of CGC.
5. GW Pharmaceuticals
GW Pharmaceuticals plc (GWPH) is a pharmaceutical company focused on discovering, developing, and commercializing novel therapeutics from its proprietary cannabinoid product platform. GW Pharma commercialized the world's first plant-derived cannabinoid prescription drug, Sativex, which is approved for the treatment of spasticity due to multiple sclerosis in 27 countries outside the United States.
GW Pharma has an extensive product pipeline which should enable to the company to be a major player for years to come. The company recently reported data pertaining to its Epidiolex product and we expect 2016 to be a milestone year for the company.
Continues to Advance its Epidiolex Product
Although GW Pharma has several products in its pipeline, none is more important than its Epidiolex product. Some of the projected milestones for 2016 include:
- Reported positive data from the first Phase 3 Dravet syndrome Stage 3 FDA Clinical trial
- The first and second Phase 3 LGS trials were fully enrolled and GWPH expects to release data in the second quarter of 2016
- The second Phase 3 Dravet Syndrome trial is ongoing and GWPH expects to release data in mid-2016
- GWPH plans to submit a new drug application to the FDA in the fourth quarter of 2016
- Phase 3 Tuberous Sclerosis Complex trial is underway
- During the second half of 2016, GWPH will commence additional clinical development for Epidiolex beyond initial three indications.
Deep Pipeline of Products Provides Several Catalysts
GWPH continues to make advancements in its pipeline of cannabinoid products. Some of the highlights include:
- Phase 2a CBD schizophrenia study data showed a positive proof-of-concept with a reassuring safety profile
- GWPH expects to release data from its Phase 2 CBDV epilepsy study (adults) during the second half of 2016
- Expects to commence Phase 1 clinical testing for Neonatal Hypoxic-Ischemic Encephalopathy (NHIE) during the second half of 2016
- Expects to commence clinical trials within the field of autism spectrum disorders during the second half of 2016
- The Phase 1b/2a study for the treatment of Recurrent Glioblastoma Multiforme is fully enrolled and GWPH expects to release data in mid-2016
- The Phase 2 study in type-2 diabetes is fully enrolled and GWPH expects to release data in mid-2016
- Expects to release data from its Phase 2 study of Sativex in spasticity due to cerebral palsy in mid-2016
Outlook
GWPH has seen its share price rally by more than 130% since March 11th and the shares have been trading range bound over the last month (up approximately 5%). The shares are trading well below its average Wall Street price target and we expect GWPH to report favorable data on its Epidiolex product during the next month.
We remain buyers of GWPH and see significant upside to current levels. We will continue to monitor price movements for an opportunity to add to Technical420’s position in its Mock Portfolio.
Register for Technical420.com to keep up to date with outlook with shares of GWPH.
