Things have started to turn around for the cannabis market since the 2014 pot bubble, but it can still be difficult for investors to know how to find the best cannabis stocks to invest in.
For starters, marijuana isn’t yet legal for recreational use in Canada and in many states across the US. Furthermore, a number of states and provinces are looking at legalization for both medical and recreational marijuana use, making it difficult to keep track of what licensing requirements to look for when doing one’s due diligence.
To help investors and market watchers find the best cannabis stocks to invest in, former Wall Street attorney Chris Milenkevich started Gotham Cannabis Associates, a firm that specializes in due diligence on publicly traded cannabis companies. After 11 years as an attorney with Cadwalader, Wickersham & Taft LLP, Milenkevich started looking at whether he might be able to apply his skills in a different environment, and the cannabis industry looked like the place to be.

 

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“The cannabis industry is obviously a very new industry and one that was very exciting,” he said. “It’s very rare that you have a brand new industry arise.”
However, he also noted that the cannabis industry is currently characterized by a lack of information, despite there being no shortage of people looking to get involved in the space. “I really realized there was just such a need for quality, sophisticated diligence of the kind that I was used to doing for so many years Wall Street,” he said.
Certainly, Milenkevich has a stronger grasp of the legal landscape in relation to cannabis than most, making his insight extremely helpful when conducting due diligence on cannabis companies.  The Investing News Network spoke with him about what investors should keep an eye out for when looking for the best cannabis stocks to invest in.

Legal considerations: Can the best cannabis stocks to invest in cross state lines?

As mentioned above, cannabis is legal in 24 states in the US, but it is not legal at the federal level. That can lead to some complicated legal issues.
For example, Milenkevich pointed out that cannabis companies cannot use water from a federal aquifer. “If they’re drawing water to use in their cultivation, or to use in their extracting processes, and the water they’re using comes from a federally owned aquifer, they could actually get into a lot of trouble,” he explained.
“There are cannabis companies out there who have realized this is an issue, and they now have to contract private supply water companies to make sure they don’t run into a ton of mess.”
Another, perhaps more interesting point, is that cannabis companies cannot file for federal bankruptcy protection, which Milenkevich says is something that most investors don’t realize at all. “Bankruptcy in the United States is largely a matter of federal jurisdiction and bankruptcy court has rejected cases filed by cannabis companies,” he stated.
Finally, though you might find one of the best cannabis stocks to invest in in Washington, Oregon or Colorado, it’s worth keeping in mind that those companies cannot cross state lines. That makes it difficult to scale and grow a company effectively.
“People get very excited the idea of building a nationwide empire, forgetting that you can’t manufacture a cannabis product in one state and start selling it in another state,” Milenkevich said. For example, a growing cannabis company couldn’t simply expand its operations in Oregon and ship product to Washington.

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Investing in cannabis stocks can still be a bit of a mystery. A number of states and provinces in Canada and the US are in various phases of legalization for both medical and recreational marijuana use, making it difficult to know what sort of fundamentals to look for.
To get a bit more insight into the space, the Investing News Network got in touch with Alan Brochstein of 420 Investor. In the interview below, he speaks about the current state of the market, cannabis stocks he likes, and what to look forward to in terms of positive catalysts.
Overall, while he believes the 2014 pot bubble may have scared a lot of investors off, things are getting a bit better for cannabis stocks and the marijuana market.

 

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The state of the market

For starters, Brochstein clarified that the cannabis market in 2014 was a trading market. Rather than being full of quality companies with long term investors, “it was a big momentum trade,” he said.
“I’ve been following the industry for a little over 3 years now, and the public markets are still pretty much not invest-able,” he added, “but the good news is, it’s getting a little bit better.” Brochstein stated that the cannabis market has been in a long downward slide, with the index that he creates losing over 95 percent of its value. However, the index is slowly starting to recover, and the market is now in a resurgence.
What’s driving that turnaround? One catalyst Brochstein pointed to was the release of phase 3 clinical trial data by GW Pharmaceuticals (NASDAQ:GWPH) in March for its drug Epidolex. GW saw its stock double on the news, and the company hopes that its study of the epilepsy drug will confirm the therapeutic benefits of cannabinoids. “That kind of sparked the market,” Brochstein said.
In terms of what to watch for going forward, Brochstein pointed to two catalysts he sees on the horizon:

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There’s a specific stock poised to benefit from the growing marijuana market, according to JP Morgan, but it might not be the one you’d expect.
The firm recently raised its target price for Scotts Miracle-Gro (NYSE:SMG) from $70 to $85, citing an expanding hydroponics market as a driver for growth. As per an article from Barrons, JP Morgan analyst Jeffrey Zekauskas believes the company is shifting its focus to the hydroponics market.
While Zekauskas notes that hydroponics revenues currently represent only about 6 percent of the company’s total business, he sees the marijuana space stoking growth in this area.
“The hydroponics market taps into marijuana demand and the company now has a growth option that we think an investor is able to capture for about the price of the traditional business,” he stated in a note.
Scotts was trading up 3.72 percent on Monday at $82.52 per share. The company is up 28 percent so far in 2016.
Don’t forget to follow us @INN_Resource for real-time news updates!

 

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Securities Disclosure: I, Teresa Matich, hold no direct investment interest in any company mentioned in this article.

Canopy Growth (TSX:CGC) has increased its previously announced bought-deal financing due to strong demand. The financing will be increased from $25 million to roughly $30 million.
As quoted in the press release:

The Company has agreed to grant the Underwriters an over-allotment option to purchase up to an additional 1,233,000 Common Shares at the Offering Price, exercisable in whole or in part, at any time on or prior to the date that is 30 days following the closing of the Offering. If this option is exercised in full, an additional $4,500,450 in gross proceeds will be raised pursuant to the Offering and the aggregate gross proceeds of the Offering will be $34,503,450.
The Common Shares will be offered by way of a short form prospectus to be filed in all provinces of Canada (except Quebec). The Company intends to use the net proceeds from the Offering for working capital and general corporate purposes. The Offering is expected to close on August 24, 2016 and is subject to certain conditions including, but not limited to, the receipt of all necessary regulatory and stock exchange approvals, including the approval of the Toronto Stock Exchange and the applicable securities regulatory authorities.

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Canopy Growth (TSX:CGC) has closed a $5.5 million financing via two loan facilities. The funds will be used to refinance building construction and for expenditures related to the purchase of capital equipment.
As quoted in the press release:

The new financing is comprised of two separate loan facilities: a term loan and a revolving line of credit. The 5 year term loan is for approximately $3.5 million and is provided on commercial terms. The revolving loan, in the amount of $2.0 million, bears a variable interest rate based on the CIBC prime rate with a 5 year term and interest only payments.
The financing is secured by a first charge mortgage on the Tweed Farms property, a first position on a Tweed Farms general security agreement and a specific security interest, backed by a corporate guaranty from Canopy Growth.

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Canopy Growth Corporation (TSXV:CGC) has received final approval for listing on the Toronto Stock Exchange.
As quoted in the press release:

The Common Shares will commence trading on the TSX effective as of the open of the market on July 26, 2016. Upon listing on the TSX, the Common Shares will continue to trade under the symbol “CGC”. In conjunction with listing on the TSX, the Common Shares will be delisted from the TSX Venture Exchange prior to the commencement of trading on July 26, 2016.

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