The cannabis industry is comprised of several different subsections that all hold their own inherent values. Although the majority of the market has gone through substantial troubles in the past few weeks due to the coronavirus, some areas of the industry have higher correlations with volatility than others. It seems as though we can break down the cannabis industry into three different sub-sections. First, we have the pure-play pot stocks. These companies are in the business of producing as much cannabis as they can to help supply the various global markets with marijuana.
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Second, we have the extraction and retail marijuana stocks. These two different areas occupy a relatively similar area of the market. On one hand, extraction companies work by producing extracts for both retail sales and on a contracted basis. Retail companies work by opening large amounts of dispensaries to sell either a vertically integrated product or many different products from various suppliers.
Lastly, we have ancillary cannabis stocks. These companies support the cannabis industry by offering REIT services, banking, money transport, grow supplies and more. With these areas of the cannabis market defined, we can list them by volatility and their potential exposure to heightened market fluctuations.
Pure Play Pot Stocks
The pure-play pot stocks seem to be the most volatile and the ones with the most exposure to coronavirus related concerns. As major growers, these cannabis stocks are at the frontlines of the industry. In the past two years, we have seen pure-play pot stocks carry the burden of industry volatility. It does not look like anything is changing any time soon.
Examples of pure-play pot stocks include Canopy Growth Corp. (CGC Stock Report) and Aphria (APHA Stock Report). Both companies have their own inherent troubles. But, both are also highly subjected to large shifts in pricing on a daily basis. In the past two weeks, we have seen these pot stocks be hit especially hard by the coronavirus, shedding as much as 60% of their values. So for more cautious investors, these companies may not be the ones to look out for.
Extraction and Retail Pot Stocks
This area of the market is somewhat secondary to pure-play pot stocks. While these companies may touch the physical plant, they are not in the business of producing cannabis by itself. Rather, extraction-based companies work by producing extracts either for their own sales or via contracts. Because of these contracts, these companies are often more stable than most others. This is not to say that they are immune to market fluctuations, but they are one step removed from the top. An example of this is Valens (VLNCF Stock Report), which produces extracts and extract products.
On the other hand, we have retail cannabis stocks. This includes both multi-state operators and companies that sell retail cannabis products. Multi-state operators are known to be some of the most profitable pot stocks in the market simply due to their business models. Again, these companies are not immune to fluctuations in value as they can be some of the largest pot stocks in the market. One example of a leading MSO is Trulieve Cannabis TCNNF Stock Report). This company is one of the largest in the industry and for good reason.
Ancillary Pot Stocks
Lastly, we have ancillary pot stocks. These companies have the least amount of exposure to the cannabis market and oftentimes, they operate the majority of their business outside of the marijuana industry. Because of this, they can be less volatile than most other cannabis stocks. But, it is always important to know the main business of an ancillary company as that part is also subject to its own level of fluctuation.
In the cannabis market, Scotts Miracle Gro (SMG Stock Report) is one of the more well known ancillary cannabis stocks. But, the majority of its business is in the home gardening industry. Recently, these companies have gained a larger share of the marijuana space as they see the potential for the future. So for the more cautious investors, ancillary pot stocks may just be the place to start looking.
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