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2 pot stocks I think could light up the market this year 

Excitement over the impending legalisation of the recreational use of cannabis in Canada has sparked a frenzy of market interest in junior cannabis companies. Bigger players on the Australian scene, like Auscann Group Holdings Ltd (ASX: AC8) and Cann Group Ltd (ASX: CAN), have seen their market caps swell to over $400 million as they position themselves to become the key exporters of Australian-grown cannabis to a global market. 

But there are some other smaller cap companies trading on the ASX that – while risky – could offer some unique growth opportunities to those investors wanting to enter this space. 

Hydroponics Company Ltd (ASX: THC)

THC is an interesting company. Like most of the other medical cannabis companies on the ASX, it has one foot in Australia and another in the rapidly developing Canadian market. But its key point of difference is that it aims to be vertically integrated along the cannabis supply chain – not only as a supplier of hydroponic equipment and a builder of large-scale greenhouses, but also as a grower and cultivator of high quality cannabis plants, and an Australian distributor of products produced by leading overseas medical cannabis companies.  

It really took the market by surprise, with its share price more than quadrupling in value in just a matter of days back in November.  

The big moves were driven by a series of positive market announcements. THC’s wholly-owned subsidiary Canndeo Ltd received its second medical cannabis cultivation license from the Australian Government’s Office of Drug Control. Canndeo then struck deals to become the Australian distributor of cannabidiol products imported from two respected medical cannabis producers in Europe and Israel. 

Since then, THC has announced a further deal with Canadian healthcare service provider National Access Cannabis, a company that operates clinics across Canada specialising in helping patients gain access to quality medicinal cannabis products. This partnership will allow a transfer of IP to THC so that it can potentially roll out a similar professional clinical model in Australia.  

And just last week THC announced that it has completed building an R&D and cultivation facility in Queensland, and is now waiting on government approvals before commencing its first pilot crop.  

Creso Pharma Ltd (ASX: CPH)

Creso’s business strategy is to apply pharmaceutical rigour and expertise to the development of medical cannabis products. It has a diversified structure, with subsidiaries located in Switzerland, Canada, Australia and Slovakia. Through these different branches of its business, Creso is able to target the full spectrum of the cannabis market, from pharmaceutical cannabidiol products for human and animal health, to recreational cannabis use in Canada, to hemp-based products in Europe. 

Creso released a market update last Tuesday to announce that development of its Canadian medicinal cannabis production facility in Nova Scotia was on track to be completed by July 2018, when the Canadian government is expected to legalise marijuana for recreational use. The market reacted positively to the news, with Creso’s share price jumping 15% on the day of the announcement.  

Creso is also in the final stages of acquiring Canadian company Kunna Canada Ltd, as well as its wholly-owned Colombian subsidiary, Kunna S.A.S. If the deal goes through as expected in March, it will make Creso the only Australian-listed medical cannabis company with a foothold in the Latin American market. However, this is also dependent upon Kunna S.A.S. receiving its government licence, which it hopes will be granted in April. 

Assuming everything goes according to plan, this could give Creso exposure to some unique growth opportunities. In its market announcement, Creso stated that Colombia could potentially supply 44% of the global demand for medical marijuana in 2018. 

Foolish takeaway

The emerging cannabis market is an exciting space to be in right now, but it comes with plenty of risks. And those risks are magnified in these small cap stocks.  

As with all ASX-listed pot stocks, Creso and THC are both yet to generate any meaningful revenues, so their market valuations are based entirely on potential. This can make the prices of their shares incredibly volatile, as a change in any number of variables – stricter regulators, increasing industry competition, changing governments, disappointing clinical trial results – can have big repercussions for unproven earnings projections. 

As an investor, you have to be certain you want to take on those risks before you commit your money to these pot stocks. 

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Motley Fool contributor Rhys Brock owns shares of AUSCANN FPO and Creso Pharma Ltd. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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