Investors have taken notice of Aussie medical cannabis company Cann Group Ltd [ASX:CAN], whose share price is currently down 3.85% at time of writing.
With no company news to account for this drop, we turn to the current market trend of cannabis companies for an explanation.
The Wall Street Journal reported last week that ‘the party is over’ for pot stocks.
They noted how some marijuana producers saw their share price tumble by almost 40% a couple of weeks ago following ‘a string of disappointing quarterly reports and mounting skepticism about the industry’s rosy growth forecasts’.
Brian Athaide, chief executive of Green Organic Dutchman Holdings Ltd (a marijuana grower) was quoted as saying ‘the capital markets have dried up’.
CAN has felt this in FY19, being such a large company without the revenue to match.
In their full year results, they reported revenue of just $4.25 million against a $200 million market cap.
The company has been in a downtrend since mid-April, down around 47% from their 2019 high of $2.57.
Indeed, the cannabis craze does appear to be dying down in recent months. But this doesn’t mean the sector no longer has potential.
Perhaps it just means bigger isn’t always better when it comes to pot stocks. In fact, our top three pot stocks picks here at Money Morning are all smaller than CAN.
MGC Pharmaceuticals went for cap raise right on cue
One company on the smaller end of cannabis stocks is MGC Pharmaceuticals Ltd [ASX:MXC], with a market cap of just $47.8 million.
Back in August, we wrote about MGC — noting that the company would likely need a capital raise at some point to achieve their goal of breaking into the European market.
A week after we flagged this, MGC issued nearly 120 million additional shares at $0.04 each, raising $4.75 million for the company.
They then issued a further 25 million shares as part of a $1 million priority offer.
Their share price subsequently dropped, down 1.8 cents in this period to 3.5 cents.
Now that they have the funds, however, MGC are set to expand their UK reach.
In fact, MGC announced earlier this week that they had reached and surpassed the 600-prescription key milestone in Australia and the UK.
200 prescriptions were added in this month alone so far.
Co-founder and MD Roby Zomer commented ‘the increased momentum of new subscriptions…is a testament to the effectiveness of our phytocannabinoid medicines and growing recognition from, and use by, the medical community’.
As a result, it could be set for a bounce depending on how it manages its UK entry.
Althea looking to Canadian market
Another cannabis stock worth taking a closer look at is Althea Group Holdings Ltd [ASX:AGH].
AGH have been on a slight downtrend over the last couple of months as the cannabis hype has died down.
But there’s potential ahead for the company.
Today AGH announced they have completed the acquisition of the Canadian-based manufacturing and contract extraction company, Peak Processing Solutions.
The update cited a recent CNN report which claimed that Health Canada’s interest in accepting further cannabis-derived goods like edibles and beverages, could be ‘a billion-dollar boon for Canada’s burgeoning cannabis businesses’.
The report also mentioned a new projection of Canada’s cannabis industry, estimating that the market could hit US$3.7 billion by the end of 2020.
Be aware of financials, look to overseas markets
So what’s the takeaway from all this?
The key is to be discerning and well aware of the financial state of cannabis-companies.
If they are burning through cash and not growing revenue quick enough, it is likely the share price will suffer.
A bona-fide Australian cannabis market is still some way off — so ASX-listed cannabis companies need to search further afield for growth opportunities.
This could be the UK, Europe or Canada.
For Money Morning