Marijuana Stocks Having A Great 2017: Expert Explains What's Going On Sector By Sector, Week By Week

Viridian Capital Advisors, one of the world’s top financial and strategic advisory firms for the cannabis industry, publishes two reports every week. One traces the performance of its Cannabis Stock Index, and the other one tracks the most recent investment and M&A activity in the marijuana space.

As usual, Benzinga had a weekly call with analyst Harrison Phillips, who shared some insight into how marijuana stocks, and thus, Viridian’s Cannabis Stock Index, moved in the first three weeks of the year.

A Head Start

After a great 2016, where it gained 236.1 percent, the Cannabis Stock Index continued to post positive returns in the first three weeks of 2017: 3.8 percent in the first week, 4.7 percent in the second week and 4.6 percent in the third week – totaling 13.6 percent for the three weeks ended January 20.

"The first week of the year you see the high volume on the first day of trading; that's the January Effect there,” Phillips explicated. “We see volume in the index remained between 75 million shares and 100 million shares pretty much every day that it's traded – except for January 16 and January 17.”

“January 16 was Martin Luther King Jr. Day in the U.S., so the markets were closed there. So, what we are seeing there is the volume traded in the international securities in the index. And then, on January 17, it appears there was latent demand for securities, which is why you are essentially seeing about two days' worth of volume,” he added.

Week By Week, Sector By Sector

The analyst moved on to share a brief look into each week.

“When you look at the sectors for the first week, you see than all but two of the sectors had positive returns, and all four of the market indices had positive returns. So that, we really attribute to the January Effect that we spoke about in a previous article,” Phillips said.

"Going into the second week, the index had a greater return overall, but if you look down at individual sectors, their returns were much more mixed, just like we saw with the market indexes returns,” he continued. “So, that lends a little bit of evidence to the fact that these were not driven by the January Effect, which was what we expected.”

“What happened in the second week that ended January 13 is that we had the Congressional confirmation hearing for the U.S. Attorney General nominee Jeff Sessions,” the expert pointed out. “So, in the first week we noted that we would expect a potential movement surrounding this confirmation hearing, given that it's been a hot topic in the industry lately. But, based on the performance of the index, it seems like cannabis stocks were largely unfazed by his testimony. It seems like his testimony was pretty much in line with what investors had expected, so, we didn't see any material bump, either up or down, in the index, following his speech."

"For the third week, ended January 20, the index was up, again,” he supplemented. “That actually marked the sixth straight week of positive returns in the index— Again, this past week the returns by sector were largely mixed, but there were a few sectors such as the infused products and extracts, and miscellaneous ancillary that had double-digit positive returns, that helped bring up the index overall, even while each of the four main market indices declined. So, while the general market was flat or declining slightly, the index was up, even with volatility between the returns of individual sectors."

Understating Cannabis Industry Valuations

As of the second week of 2017, Viridian added a new section to its Index report, which provides a snapshot of the median price-to-sales multiples in each sector of the index.

It should be noted, however, that the index comprises only 50 companies. So, some sectors include just a few companies, making some of these multiples unrepresentative of the sector as a whole. However, Phillips noted, “They do at least show some proxy as to the way that investors are making these bets.”

"When you break it down by sector you kind of see where investors are putting more bets into speculative investments, or investments into things that are already generating returns,” he explicated.

"If you look at biotech, we expected biotech/pharma companies to have quite large price-to-sales multiples— People invest in biotech for the prospects of future commercialization of these drugs that are under development. So, it makes sense to see these high multiples,” the expert went on.

"Real estate is similar in that there may be a large asset base or an investor group, such as Innovative Industrial Properties Inc IIPR that IPOed last year. There's the premise that these groups could generate quite a substantial asset base, to generate returns from. So, people are essentially betting on these firms that, as they continue to roll out, that the demand for real estate will drive up, either the value of the asset itself or the cash flows that come off the asset as cannabis is a special real estate opportunity [...] And, because of that specialization, the landlords can demand additional revenues."

Finally, Phillips looked at the multiples of groups such as consumption devices or hemp. “The hemp is more commoditized than cannabis itself, because hemp has been legally grown around the world, so it's really more of an agricultural play. So, we've seen these lower multiples in more mature parts of the market. Same goes with consumption devices: These are the vaporizers and other consumption devices, which have typically been utilized for other products such as tobacco or nicotine juices. So, while the technology is being carried over to the cannabis space, there are already established businesses there that have helped develop that industry and that have driven down these multiples."