A farm to pharma strategy could pay off for these stocks

Wednesday, 27 December 2017
Melbourne, Australia
By Terence Duffy

  • Not all cannabis plants are the same
  • A vertical integration strategy
  • Two for the watch list

Editor’s note: Kris Sayce, Bernd Struben and the staff at Port Phillip Publishing are taking a break for the holidays. We will be returning to our posts on 2 January, 2018. While we’re away, we’re bringing you some complimentary back-issues of Money Morning Trader.

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The following article was originally published on 9 November 2017.

When we think about cannabis, we usually think about it in terms of recreational use — people getting high.

That high comes from a compound found in the cannabis plant called THC. However, most of the medical research being done at the moment is focused on the non-high-inducing element, Cannabidiol or CBD.

CBD is a compound that’s been shown to be very effective in relieving chronic pain.

But research has demonstrated CBD’s potential to go beyond just pain management, and to be used to treat a wide range of conditions.

Arthritis, diabetes, alcoholism, MS, epilepsy, and more.

It’s also been shown to have protective effects on the brain and is finding use in sports-related concussion injuries.

For a long time, plants with high THC levels have been the most sought after, because their only real purpose was for recreational use.

But different varieties of the plant contain different levels of each compound.

And by breeding different strains and having control over the growing process, CBD levels in the cannabis plant can be increased.

This is why having control over the cultivation is so important.

Not many cannabis companies can boast full vertical integration, from planting through to supplying medicinal cannabis to the market.

But here’s a couple that have the ‘farm to pharma’ strategy in place:

Firstly, let’s take a look at Creso Pharma Ltd [ASX:CPH]. This company didn’t wait around for the Australian government to hand out licences to farm cannabis.

Instead, the company purchased Canadian medicinal cannabis start up Mernova Medicinal Inc., in July this year.

The Canadian acquisition now allows Creso Pharma to grow its own crops once the licensing is formalised. It also gives the company direct access to the Canadian market, which is the largest medicinal cannabis market in the world.

Mernova have a large parcel of land highly suited to the cultivation of cannabis and are constructing a 20,000 square foot facility.

Further upside is that completion of the facility is being targeted to coincide with Canada’s full legalisation of recreational cannabis use in July next year.

Thereafter the company has plans to expand the facility onto an adjoining parcel of land, bringing the total to 200,000 square feet. First revenues from Canadian operations are expected in September 2018.

Let’s bring up the chart:

chart image

Source: Optuma
Click to enlarge

The bottoms have been rising for the last five months and the share price is finding resistance at around 66 cents. That gives you some reference points to guide your own analysis.

A close above 66 cents might indicate more positive news to come for Creso Pharma. Let’s wait and see.

Now to AusCann Group Holdings Ltd [ASX:AC8]. In May, this company received a licence to plant Australian crops, followed in August with a licence to manufacture cannabis medicines.

That made AusCann one of the few medicinal cannabis companies to own the entire supply chain.

Let’s bring up the chart…

chart image

Source: Optuma
Click to enlarge

Share price is finding support at around 40 cents and resistance at 64 cents. That gives you some guide posts to do your own analysis.

A strong close above 64.5 cents, might indicate more good news to come for the company.

It’s had a strong run up from the low, ideally we’d like to see it retrace from here, but the market doesn’t always give you what you want.

Anyway, these are a couple more for the watch list. In fact, you could continue to watch the entire sector.

Broader awareness of the medical benefits of cannabis combined with the gradual easing of government restrictions around the globe is creating favourable tailwinds for this industry.

It’s a space to watch.

Good trading,

Terence Duffy,
Editor, Money Morning Trader

I (Bernd) thought you might like to see how this one played out. Below you can see what the chart did tell you, as updated on 6 December:

chart image

Source: Optuma
Click to enlarge

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