No bull market has grown bigger horns this decade than medical marijuana, and while there’s not as much big pot money to get in on in the U.S., the Canadian play ground is about to explode.
Not only is medical marijuana federally legalized in Canada, but the government has now begun the process of legalizing its recreational use, and this will open the flood gates for producers whose stocks are already soaring to amazing heights.
The launch of the first marijuana exchange-traded fund (ETF) in Canada took place in the first week of April, giving us diverse exposure to this tantalizing sector. The Horizons Medical Marijuana Life Sciences ETF (TSX:HMMJ) launched on the Toronto Stock Exchange with 11 Canadian-listed stocks and four U.S.-listed stocks.
Here are 5 stocks we think are worth watching closely in the immediate future:
#1 Canopy Growth Corp. (TSE:WEED) (OTCMKTS:TWMJF)
Currently trading with a market cap of CAD$1.66 billion, this company is considered Canada’s first ‘cannabis unicorn’, and it’s been on a bull run for a while.
This company is ripe for the legalization of marijuana for recreational use. It’s just announced the licensing of new facilities at its flagship project at Smiths Falls, with expanded growing capabilities. It’s also just been granted approval for more expansion. This is also the first cannabis company to be included in the new S&P/TSX Composite Index.
Shares in Canopy Growth jumped 9 percent to $10.84 on 27 March, just when the Canadian government clarified that it intended to legalize recreational marijuana in time for Canada Day celebrations in July next year.
Overall, Canopy has seen its stock rise more than 386 percent in the past year, making it a real ‘unicorn’ (the favored term for start-ups hitting the billion-dollar mark).
#2 Invictus MD (TSX:IMH.V; OTC:IVITF)
This is another first—and it’s a big one: Invictus is the first licensed medical marijuana company to pay a dividend to shareholders, and it’s also well-prepared for the legalization of recreational marijuana.
We’re watching Invictus closely because it’s been smartly targeting small- and mid-size companies with significant growth potential, and its strategy is all about profitability. It’s also not afraid to get down and dirty. Its owners were quietly scooping up ‘pick and shovel’ assets to lower the costs of its marijuana production, and just waiting for a big reason to draw everyone’s attention: Legalization of recreational use will do it.
And the kicker: In December they paid their shareholders $1 million in dividends. That’s something no cannabis company has done yet.
Recently, they’ve made some game-changing acquisitions valued at some CAD$90 million. They own over 33 percent in AB Laboratories Inc., which received its cultivation license last October, and the sales license is expected in Q2. It’s also in the process of closing its acquisition of 100 acres with AB Ventures Inc., and is targeting production here of 25,000 kilograms by 2020.
In Alberta, Invictus MD will be exercising its option to acquire 100 percent of the most recently granted license at Acreage Pharms. The cultivation license is currently for an 8,000 square foot facility and a 30,000 square foot expansion plan. The property is approximately 150 acres and can accommodate for millions of square feet of cultivation expansion as demand increases.
The catalysts keep mounting for this small-cap with large-cap savvy.
#3 GW Pharmaceuticals (NASDAQ:GWPH)
If you’re not ready for a cannabis producer—despite the major Canadian catalysts—this cannabinoid-based drug developer is a good bet, even State side because these companies aren’t likely to be negatively affected by the Trump administration’s indications that it’s not marijuana-friendly.
GW Pharmaceuticals is a biopharmaceutical company that develops and commercializes therapeutics using a proprietary cannabinoid product platform.
This company has a $3 billion valuation thanks to success in pivotal Phase 3 trials of Epidiolex, an experimental drug targeting treatment of two rare types of childhood-onset epilepsy. Right now, we’re probably looking at a 50 percent change of FDA approval because of these tests, so things are looking pretty good.
#4 Sanofi (NYSE:SNY)
If you’re wondering why big pharma isn’t cashing in on the medical marijuana bonzana, this is why: They’re sitting on the sidelines right now. Why re-invent the wheel? They bide their time letting the ambitious small-caps spend all the cash with development and clinical trials. Once it’s all across the finish line, they will swoop in and buy them up. They won’t compete with them. They will own them—eventually, so there’s no need to dabble in this until it’s all solid. For now, though big pharma is bent on blocking progress in terms of legalization of recreational marijuana, but this is smoke and mirrors—they’re just buying time, with some working on synthetic strains of marijuana.
Given the momentum particularly in Canada right now, we think it’s time to start looking at a couple of the biggest pharma companies who will likely benefit from all the small-cap breakthroughs in this segment.
So we start with France-based Sanofi, which is currently trading as a $111.51-billion market cap company. Since its IPO in July 2002, Sanofi’s performance year to date is 8.41 percent. The company has seen EPS growth of 1.40 percent for the last year, and performance of 10.19 percent for the same period.
Sanofi’s biggest growth driver will likely be Dupixent—a powerful new drug for eczema--which is expected to hit sales of US$4.3 billion by 2022, over half of this in the U.S. Dupixent is a major drug blockbuster, and it won FDA approval on 28 March. This is a huge catalyst that sets up Sanofi for a brilliant year.
#5 Pfizer (NYSE:PFE)
This drugmaker offers sizzling dividends, and its growth picture looks very solid, for the first time in a long time. Pfizer’s two segments—innovative health and essential health—generated $52.8 billion in revenue last year, with net income of $7.2 billion. Its operating cash flow was nearly $16 billion. While its legacy products are experiencing declining sales, its new products are now very promising, and this is the year that we’ll really see growth, particularly with two new cancer drugs and an autoimmune disease drug.
What is most likely Pfizer’s most attractive aspect is its financial flexibility, which puts it ahead of its peers. The company’s debt-to-equity ratio wasn’t great for Q1, but keep in mind, this was because of a series of acquisitions (Anacor Pharmaceuticals, Hospira, Medivation).
More than any other, this company is set up with cash that will allow it to take advantage of any really good acquisition opportunities. Even amid still competition and tough patent battles, Pfizer is still impressing with increases in revenues year-on-year.
Honorable Mentions? Of course:
- Aphria Inc. (OTCQB:APHQF, TSE:APH)—This is the second biggest cannabis producer in Canada, and it’s only recently been put on Canada’s index funds.
- Aurora Cannabis Inc.(TSXV:ACB)—another Canadian cannabis giant-in-the-making, this company could give Canopy Growth a run for its money.
- Merck (NYSE:MRK)—This drug industry leader is on the bounce-back. The some $170-billion market-cap company’s Keytrude drug, which won approval for treating melanoma in 2014, could reach peak annual sales of $8 billion, and the stock is up some 20 percent since Q1 2016. And it’s got more in the pipeline.
- Johnson & Johnson (NYSE:JNJ), Novartis (NYSE:NVS), and Roche (NASDAQOTH:RHHBY) also all have very hot pipelines. JNJ probably has the biggest pipeline, and Novartis’ cancer portfolio is looking extremely attractive. Roche has about 150 products in development.
- Canadian Knight Therapeutics (TSX:GUD) has beat analyst expectations (in Q! 2017), earning $7.9-million on revenue of $1.8-billion—compared to $300,000 it reported in the same period last year. Still needs more in the development pipeline, though. (Market cap, CAD$1.45 billion)
- ProMetic Life Sciences Inc.(TSE:PLI)—This CAD$1.4 billion-market cap company has just remedied its financing overhang, and also got a boost from a $9.5-million purchase order.
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