How To Analyze Weed Stocks

Weed stocks are the latest buzz in the investment world. Puns aside, the good-good has taken investors by storm. Forcing them to analyze various aspects of the cannabis business to decide where to allocate capital.

Many investors are intimidated by the weed industry. It’s new. It’s hot. And everyone has an opinion on which company will rise to the top. Yet when you break it down, the marijuana industry is like any other Wall Street category. There’s winners and losers. Companies with moats and pump-and-dump schemes.

This article will teach you how we at Macro Ops analyze weed stocks. You’ll learn:

• Weed stock fundamentals

• How to read weed stock price charts

• Dangers To Avoid

Let’s blaze forward.

Weed Stock Fundamentals: Know The Players

There are three segments that comprise the weed industry:

1. The Growers

2. The Biotechs

3. The Picks and Shovels

Let’s break these down.

Weed Growers

Weed growers are self-explanatory. They’re the companies actually growing the product in the field for either sale or as a raw material to another company’s end product. Examples of weed growers include Canopy Growth (CGC), Organigram Holdings (OGI), and Aurora Cannabis (ACB).

The one thing that matters when analyzing weed growers is the scale of operations. The company with the greatest scale advantage will take the most market share. This is because they’ll produce the most volume at the cheapest price.

As they produce more product they’ll generate more revenue. This allows them to buy more production space (acreage/farmland, etc.). Then the cycle repeats.

Currently, ACB is expected to produce the most weed with up to 700,000 kilograms per year in run-rate production. The next largest grower is CGC, with an estimated 500K - 525K kilogram run-rate production capacity.

Scale is important in the weed industry because it creates first-mover advantages. Once a company gets scale advantage, it’s nearly impossible for others to compete.

Yet there is one massive disadvantage to investing in weed growers: Commodity products. Like oil or cotton, weed is a slave to its market price. The higher the price for weed, the more money the growers make. But if weed prices collapse, weed-growers are left selling their product for quarters on the dollar.

Weed Biotechs

Weed biotech companies are focused on producing marijuana-based medicinal therapeutic products like prescription drugs.

If I’m honest, the best advice here is to skip the biotech stocks. There are myriad reasons for passing on this segment. First, biotech stocks (in general) live and die by trial results. Such stocks can gyrate wildly around their Phase 1, 2, and 3 results.

Stocks that show promising initial results will see run-ups into phase results. But if they miss slightly the shares collapse.

We also haven’t mentioned the tremendous knowledge needed to analyze these biotech stocks, much of which required a few initials after your name.

Besides the technical hurdle, biotech companies burn cash during their trial periods. This requires either constant share dilution or debt financing.

Your time, capital, and energy are better spent elsewhere. Like our final weed industry segment.

Weed Picks and Shovels

This is my favorite segment of the weed industry. Picks and shovels companies produce the ancillary products/service needed to make or sell the end product. Think of packaging companies for food and drinks. Bottling companies for Coca Cola soft serve. Or backend software for front-end development.

These companies are usually small pieces of large operations, insulated from recessions and cost-cutting efforts. This also means they can generate healthy margins as their end-customers aren’t as price elastic for their product.

Two examples of picks and shovels companies are Innovative Industrial Properties (IIPR) and KushCo Holdings (KSHB). IIPR owns and leases office buildings to medical marijuana companies. The company’s prospects look attractive as more states open their doors to medicinal marijuana practices. Plus as a REIT, IIPR is required to distribute 90% of its profits to shareholders.

KSHB is the leading packaging supplier to the cannabis industry. The company makes various products including bottles, tubes, vaporizer cartridges, and more. KSHB’s sales are directly correlated with marijuana sales. This makes sense. The more people want to buy marijuana, the more packaging retailers need.

KSHB is the perfect example of a picks and shovels business. They face none of the commodity risks yet maintain an integral part in the end product’s viability.

How To Analyze Weed Stock Price Charts

The final component of our weed stock analysis is price chart analysis. I’m not referring to complex theories like Fibonacci sequences or fifteen different moving averages. We’re looking for simple support and resistance lines. Here’s what I mean:

• Support: Price area where investors are happy to buy more, thus supporting the stock price

• Resistance: Price area where investors are eager to sell more, thus resisting further moves higher

Analyzing charts allows us to find these support and resistance points and capture on breakouts or breakdowns from these areas. For example, if a price has bumped up against $15 for a few months (resistance) -- then breaks out to $17 -- that’s the market telling us something. We should probably get long.

Inversely, if a stock has support at $10 then breaks below to $8, that’s the market telling us further selling will likely follow.

CGC is a perfect example. The stock has met $29 resistance two prior times. If it breaks through on the third try, we should see further higher prices.