The No. 1 Cannabis Stock To Own In 2019

It has been a wild ride for cannabis stocks in 2018. The largest cannabis producer, Canopy Growth Corp (CGC), had their share price rocket from $24 to $57 in the two months leading up to full legalization in Canada. This represents a gain of 137% in under two months. The share price has since corrected to around $33 and looks to be offering an attractive entry point once again.

top cannabis stock pick 2019Shares of Tilray (TLRY), the first cannabis company to IPO in the United States, had an even more impressive ascent. Their share price rocketed from $22 to around $300 briefly, before collapsing back to the $100 level. A low float and the distinction of being first to trade on a major exchange in the U.S. helped push the share price to such nosebleed levels.

But as is usually the case, investors bought the rumor and sold the news (regarding full-scale legalization in Canada). Valuations of Canadian cannabis companies cratered following legalization. Provincial governments also created bottlenecks and inefficiencies that led to many retails outlets running out of supply.

Even today, cannabis outlets in Canada have only been able to secure a fraction of the product they have ordered. There is plenty of finger-pointing happening, but government distribution and regulation is a key factor in the slower-than-expected rollout. This has led to disappointing Q3 financials for many of the large cannabis growers.

While there is currently a lack of sufficient supply to meet demand, it is believed that the large amount of investment in production facilities over the past year will soon lead to oversupply in the markets. This oversupply will likely lead to lower prices and margin compression for cannabis growers starting at some point in the back half of 2019. So while the producers should do well for another 6 to 12 months, they will eventually face headwinds and declining profit margins from their grow operations.

This is why we have been focused on investing in cannabis companies that derive a significant portion of their revenue from activities other than growing the plant. This includes things such as distribution, brand building, value-added production like oils and edibles, cannabis-infused drinks, legal/regulatory consulting and retail operations. The margins in these activities should be shielded from any oversupply issues that come up in the years ahead.

At Gold Stock Bull, we first started buying cannabis stocks in the summer of 2017. Even with the recent correction, we have still realized the following gains:

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Beating Buffett 6 months ago Member's comment

Thanks Jason Hamlin. I like $CGC as well. What do you think about #StemHoldings? Just read a good article about $STMH here: www.talkmarkets.com/.../stem-holdings-getting-in-on-marijuanas-ground-floor