This is individual research and does not constitute investment advice.
Peter Lynch famously stated, “Everyone has the brainpower to make money in stocks. Not everyone has the stomach.”
Over the last several days, the broader markets have been rattled by headlines. There was a lot of red to end the week.
In the cannabis industry, the biggest news came from its biggest player.
Canopy Growth Corp. (NYSE: CGC) announced it was expanding its hemp production from New York to Rhode Island and another three states. This is part of the “CBD in everything” bonanza. And Canopy is upping its U.S. hemp investment from $150 million to as much as $500 million.
Meanwhile, SEC filings show that 22 different U.S. funds have been gobbling up shares of Aurora Cannabis (NYSE: ACB). The consensus price target for Aurora is currently $10.08. So that’s decent upside from where it’s currently trading, about $7.50. It also means Canopy’s and Aurora’s more than 50% gains over this past month may be just the beginning.
That brings up an important question: With the big run-up in pot stocks recently, is there any gas left in the tank?
We’ll consider the answer below.
Making the Grade
Investors should always be adding to their tool kits.
There’s a rainbow of technical and valuation measures available to help determine whether shares are overvalued or undervalued. At the very least, they can help pinpoint entry points.
I believe before you pony up dollars for a stock, it’s important to know how that stock measures up. Not against some ideal number but against its peers.
This week, we’re looking at the relative strength index (RSI). This is a momentum indicator that measures the magnitude of recent price changes.
The two rules of thumb are…
- An RSI reading above 70 is overbought (overvalued).
- A reading below 30 is oversold (undervalued).
My team and I found that the average RSI for pot stocks is 55.93. That means, as a whole, they’re not overbought. Though they are getting expensive.
And we found that a few are even above 70…
Heritage Cannabis (OTC: HERTF) shares are up 100% in the last month. So its RSI leads the pack, to no surprise. Not to mention Cronos Group (Nasdaq: CRON) shares have surged more than 70% in that span.
Next, we have our 10 most oversold cannabis companies…
Auxly Cannabis (OTC: CBWTF), Cannara Biotech (OTC: CNBTF), Isodiol International (OTC: ISOLF) and MJ Holdings (OTC: MJNE) have lagged not just the cannabis sector but also the broader markets recently.
This shows that despite the run pot stocks have made in 2019, there’s still plenty of value out there!
And some of the stocks mentioned above are also on our list of pot stocks to watch this week…
Top 5 Penny Pot Stocks to Watch
This week, we’re zeroing in on penny pot stocks.
These are companies that are looking to be the next cannabis kings and queens… or at least princes and princesses. But they’re still quite small, just getting their empires up and running.
1) Eve & Co. (OTC: EEVVF): Eve & Co. delivered its first shipment of 162,000 grams of dried cannabis in December. Once up to full speed, it expects to produce 50,000 kilograms per year.
It’s dipping its toes into international waters. At the end of January, Eve & Co. announced an agreement to export a minimum of 2,250 kilograms to a German distributor.
Now, because the company began selling products only in December, last year’s annual revenue was a mere $13,588.
The bright side is that’s a really low bar to beat. The downside is there’s a ton of competition.
Shares have trailed the Horizons Marijuana Life Sciences ETF (OTC: HMLSF) over the past month. But as we saw in the RSI chart above, Eve & Co. is one of the 10 most oversold pot stocks.
2) Golden Leaf Holdings (OTC: GLDFF): This one is also lagging the Horizons Marijuana ETF over the last 30 days.
But really it’s been a rough couple of months for the multistate operator.
In December, its $125 million merger with Terra Tech (OTC: TRTC) collapsed. Golden Leaf pulled out as Terra Tech was hit with lawsuits alleging theft.
It then hired a new CEO and CFO. In recent weeks it terminated two acquisitions – one in California, the other in Nevada – but both because of bad economics.
With shares at $0.10, the $0.31 52-week high seems light-years away.
But it’s also one of the 10 most oversold pot stocks by RSI in the chart above.
And it actually has a P/B ratio of 1.10, putting it below the industry average of 5.6.
3) 48North Cannabis (OTC: NCNNF): Another penny pot stock with a low P/B ratio is 48North Cannabis. The female health and wellness cannabis company has a P/B ratio of just 2.53.
It’s relying on a 100-acre outdoor farm. Outdoor grow-ops offer the lowest-cost production, as nature covers utilities. It’s also easier to get certified as organic. 48North’s plan is to produce 40,000 kilograms of organic cannabis per year.
It had a big one-month pop, so 48North is in the 10 most overbought pot stocks by RSI. It might be worth waiting for a pullback.
4) Future Farm Technologies (OTC: FFRMF): Shares of Future Farm are also well off their 52-week high of $0.74. But they could be poised for another run. All thanks to the CBD bonanza.
The company had a strong hemp harvest in 2018. And with everyone clamoring for hemp-derived CBD, Future Farm is looking to unload 2 million of its high-quality Cherry Wine hemp strain seeds.
At the same time, it’s testing a new ethanol extraction method at its Maine facility. If successful, Future Farms will convert its 20,000 pounds of hemp biomass into CBD oil.
It’s largely been tracking the Horizons Marijuana ETF over the past month.
5) Surna (OTC: SRNA): Finally, there’s Surna, a company that provides air sanitation and environmental controls for indoor grow facilities.
In its third quarter report, revenue grew 66% sequentially to $3.325 million. For the first nine months, revenue increased 51% to $7.387 million.
Its P/S ratio is 1.84… well below the industry average of 66.6.
Investors are wringing their hands over earnings, trade talks with China and another government shutdown.
But I always believe that if you look at fundamentals, embrace technicals and pay attention to valuations, you eventually win.
Those are the tools we try to arm pot stock investors with every week.
Source: Energy & Resources Digest