by Eric Vengroff, Financial Analyst, Cannabis Daily

 

As most cannabis stock prices have recently come off their highs of late 2017, it is understandable that many investors may be confused about which companies to hold in their portfolios.  Valuations of 10x sales and beyond may defy common sense, much less any conventional price/earnings or price/revenue expectations.  Recreational legalization, either de facto or impending in Colorado, Washington, California other U.S. states, Canada and other areas is widely expected to kick off a huge boost in demand, prices will be tempered by government regulation and potential oversupply, as black-market producers and distribution channels may take some time to dissipate.

As attitudes change and consumption rises everywhere, concern over a stable price for dried bud, a relatively low margin item, is legitimate, as scale may not bring big enough gains in efficiency to offset lower prices for the commodity.  So where to invest?

According to Sean Williams, writing for Motley Fool, a key differentiator among various producers is whether or they will have any production of cannabis oil.  As he points out, cannabis oils and extracts have higher price points and higher margins than dried cannabis and that if two companies have the same sales, the one producing more oils will have higher margin and profit.

MedReleaf, (TSE: LEAF $22.28 CAD), a recent acquisition target of Aurora Cannabis (TSE: ACB $7.20 CAD) been producing cannabis oil and extracts for some time and still has a major share of the oils market.  The annualized sales of perhaps $8 million are only miniscule relative to the stock’s valuation; last quarter’s $1.82 million in sales from extracts, almost a 700% increase from the prior-year quarter, so the trajectory is encouraging, and currently showing increases in price per gram, as opposed to the opposite case for the raw material.  Oil and extract sales may give MedReleaf, and by extension Aurora Cannabis, a competitive advantage.

One interesting aspect of the CBD oils and the like is the increasing body of research, with some evidence, of the pain relief qualities of cannabis extracts, independent of the psychoactive properties of the inhaled substances in marijuana.   Medical application and research is well underway in this previously under-explored branch of plant-based medicine.  Because the oil-based products contain no psychoactive properties, they fall into a regulatory area applied to other herbal and other analgesic remedies and the market can continue to expand irrespective of the legal framework associated with controlled substances domestically and internationally. Might as well be grape jelly; if the products pass health and safety regulations and don’t make any exaggerated claims, they should be good to go.

According to Williams, quoting Marijuana Business Daily’s data, Germany and Australia accounted for roughly 80% of worldwide exports of oils, which is still measured in kilograms.  Canadian production wasn’t even a rounding error in last year’s numbers.  With more Canadian producers exporting and the t the current rate of growth in the category look for tonnage here.

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