Is Emerald Health Therapeutics a Buy?

Originally posted on https://financhill.com/blog/investing/is-emerald-health-therapeutics-a-buy

The opportunities for medical marijuana investments in the North American market have never been better. As of March 2019, medical marijuana is legal in 33 U.S. states, Washington D.C., and Canada. What’s more, 10 of these states, plus D.C. and Canada, have also permitted the recreational use of marijuana.

In October 2018, medical and recreational marijuana were both legalized across Canada. Currently, marijuana can be purchased in Canada both in storefronts and via online marketplaces.

With these developments only a few months ago, investors might not yet be familiar with some of the major players in the Canadian cannabis market. So is the timing right to buy stock in one of the major players in this space: Emerald Health Therapeutics [OTCMKTS: EMHTF].

Growth potential: With medical cannabis recently legalized across Canada, and rolling out across the U.S. states, the industry is poised for a major expansion. Research and Markets projects that North American cannabis revenues will more than double from $41 billion in 2018 to $95 billion in 2026.

Promising horizontal business strategy: According to Forbes magazine, there are a variety of reasons why it makes sense for big tobacco to enter the cannabis space. In addition, gardening companies like Scotts Miracle-Gro have launched subsidiaries and made acquisitions in order to supply agricultural equipment to cannabis growers. The marijuana industry seems like a promising horizontal industry for business expansion, which makes it an appealing choice of investment.

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High-risk: Despite its newly legal status in many jurisdictions, medical marijuana is a high-risk industry. Federal law in the United States still bans the use, sale, and possession of cannabis with more than 0.3 percent THC content. Although a return to criminalization is unlikely, it’s not out of the question that U.S. marijuana laws and regulations will become more strict in the future, which could hamper the industry’s growth.

Lots of penny stocks: Although there are hundreds of cannabis stocks to choose from, most of them are penny stocks that aren’t traded on a major exchange. Investing in these penny stocks is a high-risk, volatile activity with little oversight or regulation, and you can easily lose your money if you’re not careful.

Emerald Health Therapeutics is a licensed producer and distributor of pharmaceutical-grade medical marijuana for the Canadian market, including cannabis oils and capsules. The company was founded in 2007 and is currently headquartered in the city of Victoria in British Columbia.

Dr. Avtar S. Dhillon currently serves as the company’s executive chairman and president, following the departure of former CEO Chris Wagner in November 2018. The company’s main competitors include Canopy [NYSE: CGC], Aurora Cannabis [NYSE: ACB], HEXO Corp, and Aphria [NYSE: APHA].

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Emerald Health Therapeutics is a small-cap stock with a high ceiling, which has attracted its fair share of would-be investors.

The company has already demonstrated that it’s capable of strong and rapid growth. Between October 2017 and January 2018, shares of Emerald Health Therapeutics soared, more than quintupling during this period.

In the immediate future, the business outlook for Emerald Health Therapeutics in 2019 seems promising. The company is currently retrofitting a new 1.1 million-square-foot facility on a 50-acre parcel of land in British Columbia, which it expects to be operational sometime this year.

It is also poised to take advantage of the general recent growth in marijuana stocks. Between January and October 2018, the North American Marijuana Index grew by 158%.

These astounding returns have caused cannabis stocks to outperform traditional stock market indices, such as the S&P 500 and NASDAQ, several times over.

Emerald Health Therapeutics faces two types of risks moving forward: industry-wide and company-specific.

As an industry risk, it’s still possible that there is a fundamental mismatch between the Canadian recreational marijuana market and consumer demand.

According to the Ottawa Citizen, the top 10 Canadian cannabis providers will produce 1.8 million kilograms every year by 2020—but annual consumer demand will only reach 734,000 kilograms.

While it’s possible to redirect this supply to international markets, this is a big question mark, especially for smaller companies like Emerald Health Therapeutics.

The company also faces more localized risks in terms of its ability to compete in a crowded marketplace.

As of March 2019, Emerald Health Therapeutics hasn’t yet made the cut to sell its products on the Ontario Cannabis Store, the only legal method of buying cannabis online in Ontario.

Strong growth prospects make shares of Emerald Health Therapeutics an interesting proposition for investors eyeing the cannabis stock market. However, there are a few big question marks in terms of the company’s long-term prospects and competitiveness.

For these reasons, we can’t full-heartedly recommend a buy for Emerald Health Therapeutics right now. Instead, we recommend that you check out other businesses in this space if you’re interested in buying cannabis stocks.