4 Trades in Cannabis Stocks That I’m Focusing On

by Options Sensei

Overshadowed in the confusing aftermath of the November 3 elections was the fact that cannabis was a clear winner. Of the five states where legalization was on the ballot, all of them passed by a large 65%-plus margin.  In the US, some form of cannabis, be it medical or recreational, is now legal in 38 states.  It’s now more clear than ever that people want to end the ‘war on drugs.’

Unfortunately, the government still hasn’t come around to that fact, creating continued limitations on true legalization.  However, it does offer a great opportunity to invest in the cannabis sector at an early stage and for low prices.   The cannabis sector boomed in 2018 and busted in 2019. Nonetheless, as the dust settles and rules get clarified, a handful of companies will become huge winners.

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The inability to have a national U.S. policy remains a major roadblock to tapping what would be the largest world market.  Without a legalization approval on a Federal level, the industry would remain hamstrung — by a lack of banking, brands unwilling to invest in full-scale marketing, as well as in distribution, and constraints on money managers, especially pension funds to invest in the sector. If politicians were not moved by what was basically a mandate to legalize it, they may be motivated by… wait for it… the money.

The U.S. is already the largest cannabis market with almost 85% of all global sales, which are expected to reach $40 billion by 2023. The tax revenues for states such as Colorado and California have already added much-needed money to their depleted coffers. As the dust settles over the Presidential drama, congress is coming around to the notion that legalization is a clear bipartisan issue — a win/win, scheduling a vote in December for the removal of Federal criminalization laws. Furthermore, pot stocks had a big runup leading up to and immediately after the election. But, they recently had a pullback despite a spate of solid earnings reports from major players in the space such as Tilray (TLRY), Growth Generation (GRWG), and Aurora Cannabis (ACB).   This provides a great entry point.  Speaking of great entry points, below are the top four stocks I’m looking to add to my Options360 portfolio, including two ‘pick and shovel’ (infrastructure companies) and an end consumer user brand.

1.Village Farms (VFF) entered the cannabis sector in 2017 via a 50/50 joint venture with Emerald Health Therapeutics, providing greenhouses to convert into cannabis growing operations. The company’s using a rock-solid foundation in the produce business to build a vertically-integrated cannabis business against competitors that built massive operations looking for sales. While other companies needing to cut operations after years of burning cash, VFF remains profitable and continues to expand. I expect them to eventually consolidate their large-scale growing operations, supplying the vast majority of demand created by global brands. The stock had a big break out yesterday and I’m looking for a pullback towards the $7 level to get long.

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nasdaq vff stock chart 2020

  1. GrowGeneration (GRWG) focuses on building, buying, and running retail establishments that sell products that are vital to cannabis growers, commercially and recreationally.   This includes hydroponic products, grow lights, fertilizer, and all the other grower equipment to produce a superior product with economic efficiency.  In 2020, nearly 60% of GRWG’s sales went to growers whose sales were expected to end up in consumables as the final product. The Options360 service played this name ahead of the earnings report and is now waiting for a pullback to the $25 level to re-establish a bullish position.

3.  Canopy Growth’s (CGC) my pick for exposure to ultimate broad legalization and national normalization of cannabis-based products.

4.  Constellation Brands  (STZ), the multi-national beer and liquor company owns 30% of the CGC.  STZ gives CGC a massive market budget, packaged goods expertise, and an unparalleled distribution network.

While cannabis stocks had their bubble in 2018 and burst in 2019 (as mentioned above),  now is certainly the time to pick up shares in companies that’ll thrive in a growing business.

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