Medical Marijuana, Inc. (OTCMKTS: MJNA) is one of the few cannabis stocks that is best positioned to weather the imminent market correction in the sector. Valuations in the sector are currently absurd and this stock, which was the first publicly traded cannabis stock in the U.S., is significantly discounted in view of its long-term potential.

Introduced to the public in 2009, the California based company deals with the development, sale and distribution of hemp oil that contains naturally occurring cannabinoids, including cannabidiol (CBD), a key medicinal compound in cannabis.

Fair valuation

With a market cap of just under $500 million, MJNA was trading at $0.15 a share at the time of writing (26th December 2017). This is fair in view of both its 52 week range of $0.06-$-0.22 and its market potential. It is also much lower than the share price of other players, including smaller ones, within its space—that is, industrial hemp; development-stage pharmaceuticals; nutraceuticals; cosmeceuticals; and dietary supplements industries.

As at Q32017, MJNA had a price to sales ratio of 13.7. In comparison, American Cannabis Company Inc (OTCMKTS: AMMJ) had a price to sales ratio of 20.93 during the same period. Cannabis Sativa Inc (OTCMKTS: CBDS) had a last recorded price to sales ratio of 1,117.13 and is one of the pricier stocks in the sector.

Below is a snapshot of sector price comparisons as at the time of writing:

MJNA competitor comparison; source: Google Finance

MJNA had a remarkably good 2Q2017. Its gross revenue during the second quarter rose 269% quarter-on-quarter to $6.1 million, making it the largest quarter by sales in the company’s history. Q3 and Q4 were also impressive from an operations perspective, as the company was able to deepen its presence in markets like Mexico and make forays into the EU. These development, which are expected to positively impact full-year performance, have not yet been priced into the current share price.

Besides its valuation, two other key factors make MJNA an ideal pick.

Firstly, it deals with hemp, which is derived from the part of the cannabis plant that is excluded from the definition of marijuana under the Controlled Substances Act. This means its products are federally legal and outside of the purview of the Drug Enforcement Administration. This is significant since it means it is effectively insulated from the prevailing speculation relating to legalization of recreational and medical marijuana. This speculation is what has driven share prices for most cannabis stocks through the roof and thrown valuation out of the window.

Secondly, MJNA’s management team has the right mix of skills and experience to successfully navigate the medical marijuana space. This is demonstrated by the pace at which MJNA has been able to establish a footing in other markets besides the U.S.

Below is a more detailed elaboration of these points:

Insulated from legislation hype

Interest in cannabis stocks is expected to heighten in 2018. The key catalyst for this growth is progressive legislation, though the evolution of popular culture and increased social acceptance of marijuana are also formidable growth drivers.

As far as legislation is concerned, Canada will undoubtedly be the main news driver in 2018. It is expected to legalize recreational marijuana in July 2018, a development that has already been priced into many Canadian Cannabis stocks since April 2017 when plans to introduce the revolutionary law were rolled out. Consequently, the sector as a whole in Canada is currently overvalued, according to Rob Tetrault, portfolio manager at Canada-based National Bank Financial.

The surge in valuation of Canadian Cannabis stocks is spilling over to U.S. markets. This is worrying as nationwide legalization of recreational marijuana in U.S. is still relatively far off, despite some progress (notably in states along the West Coast).

So where will the smart money go in 2018? It will go to undervalued U.S. cannabis stocks that are insulated from the legislation hype and have a solid business case.

There is arguably no better stock in this category than MJNA. As earlier stated, its products are derived from the parts of hemp that are excluded from legal definition as marijuana. Its current valuation is also significantly fair. Needless to say the stock will benefit from legalization in so far as changes in the law are accompanied by a positive shift in the public’s perception of marijuana.

It may be argued that Herborium Group (OTCMKTS: HBRM) is also a good pick, considering it also has exposure to hemp based products such as CBD and is dirt cheap, trading at next to zero . However, dirt cheap doesn’t always translate into value. Herborium joined the CBD party too late, announcing its entry into the market a few months ago.

Good management

When looking at a development-stage company like MJNA, which is at the same time operating in a nascent industry like cannabis, the role of good management can never be sufficiently emphasized. A company like MJNA needs a leader who can expertly navigate the risks typically associated with nascent sectors, such as heavy regulation, competitor saturation and sustained spending without immediate return on investment.

Dr. Stuart Titus, MJNA’s CEO, fits the profile. A physiotherapist with 15 years of experience in the field, Dr. Titus is a member of several key health associations in the U.S., such as the American Association of Pain Management. Having worked in healthcare, he understands the sector’s regulatory and stakeholder landscape well.

He also has over a decade of experience working as a bond trader in Wall Street and was instrumental in raising capital for MJNA in 2009 when it went public. Capital raising abilities and stakeholder management are critical skills that add value to MJNA in view of its capital-intensive development-stage status and the fact that it operates in a highly regulated industry.

Dr. Titus’s leadership, particularly his stakeholder management skills, has seen the company secure critical distrubution deals, most recently in August 2017 in Mexico when its subsidiary, HempMeds Mexico, was able to sell its CBD hemp oil products to the government of the State of Mexico.

The oil is meant to treat Mexican citizens suffering from debilitating conditions, including Lennox Gastaut-Syndrome and Refractory Epilepsy. That was not only MJNA’s first sale to the Mexican government, but also the first time the Mexican government purchased CBD products for its citizens. The partnership with the Mexican government is expected to be a sustained one, opening up a consistent revenue stream for MJNA.

A look at the company’s third quarter cash flow statement, which is available on its website, shows that it is pumping a lot of cash into strengthening its distrubution network in markets such as Brazil and Mexico. Its business investments in Brazil during the quarter totaled $140.1 million, signaling that it is angling for future growth in the market.

Its online marketplace and direct sales model is also a low-cost way to reach customers. Minimizing operational costs is critical for a development-stage company that is still trying to buttress its financials. Evidently, the leadership of the company has done a good job so far and will be instrumental in sustaining the upward trend.

Conclusion

Arcview Group Research estimates that revenues from the North American marijuana industry will rise from $6.7 billion in 2016 to over $21 billion by 2021. Big deals are now in the horizon and many cannabis players will start modelling themselves into acquisition targets, signaling a shift from speculation to valuation.  Big beverage players such as Constellation Brands (NYSE: STZ), the maker of Corona beers, have already bought into the sector. Through the acquisition of a 10 per cent stake in Canada’s Canopy Growth, the beer maker is working on the development of cannabis-infused beverages.

In view of the industry’s tremendous growth potential, investors need to be extra careful to pick cannabis stocks that are fairly valued and have upside potential that is underpinned by a solid business case. MJNA is one such player. Currently trading at $0.15 a share, and given the market potential outlined in the article, MJNA is set to rally this year with a price target of $0.40 by year’s end.

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