We look forward to hearing your feedback and to continuing to provide unbiased analysis on the sector in the new year.

We always break down our analysis by the Canadian and U.S. stocks due to the distinct features of the two markets. For details of how we conduct our research, you can check out our Investment Strategy Statement. The Canadian market is already fully legalized and companies are trying to ramp up production, fight for market share, and achieve profitability. On the other hand, the U.S. market remains very much like the Wild West with highly fragmented regional markets and continued regulatory changes that could alter competitive landscapes overnight. Thus, we think cannabis investors need to dissect their thinking into Canada vs. the U.S. in order to orient their cannabis portfolio construction.

Top Canada Picks : Canopy, CannTrust, HEXO

: Canopy, CannTrust, HEXO Top U.S. Picks: Basket approach including a number of multi-state operators ("MSO") and Charlotte's Web and KushCo

Top Canada Picks

In Canada, we think the industry landscape is very much settled between most of the industry participants. The largest players have established their market position through provincial supply agreements and production capacities through aggressive expansions early on. For newcomers, the barrier to entry is higher now because the Canadian market is expected to become oversupplied and there is no guarantee that one will be able to secure market access for new productions. Ultimately, we think the Canadian market will enter a stage of consolidation and elimination beginning in 2019 whereby smaller companies will increasingly look to combine to get bigger and aggregate resources.

For example, Aleafia (otcqx:ALEAF) is trying to buy Emblem (otcqx:EMHTF) because it does not have access to end markets, whereby Emblem management and Board has lost confidence in its standalone strategy and just wanted to get out by capitulating to Aleafia's low ball offer. For many of the smaller players, the only way to survive is to combine with other companies and consolidate resources so that they could compete with the larger companies such as Canopy (CGC), Aurora (ACB), and Aphria (APHA).

Thus, we think investors should focus on investing in Canadian companies that have a strong market position and are unlikely to be significantly affected by the potential oversupply and the temporarily dysfunctional system run by the government. We think the following companies are the best choices:

Top U.S. Picks

We have said this before and we will say it again, we think the best way to play the U.S. cannabis sector is to employ a basket approach that includes some of the highest quality names in the sector, including:

We like the following MSOs and believe they will become some of the most dominant players in the U.S. However, we think investors should wait for better entry points due to current valuations. Similar to the buying opportunity that emerged after Green Thumb slumped in late 2018 before recovering much of the losses, we think better entry points could surface from time to time.

Cresco Labs (OTCPK:CRLBF) : One of the recent new listings and the stock has shown incredible strength post-RTO. Its shares are currently up 2.4% from the RTO round but valuation remains elevated. Initiating coverage report coming in the next few weeks.

: One of the recent new listings and the stock has shown incredible strength post-RTO. Its shares are currently up 2.4% from the RTO round but valuation remains elevated. Initiating coverage report coming in the next few weeks. Harvest Health (OTC:HTHHF) : Very expensive stock with a decent growth profile. We would recommend waiting for better entry points. Initiating coverage report coming in the next few weeks

: Very expensive stock with a decent growth profile. We would recommend waiting for better entry points. Initiating coverage report coming in the next few weeks Acreage Holdings (OTC:ACRZF) : Acreage's all-star Board members and an experienced management team are a plus but valuation remains elevated after the stock recovered most of the losses since RTO.

: Acreage's all-star Board members and an experienced management team are a plus but valuation remains elevated after the stock recovered most of the losses since RTO. Curaleaf (OTCPK:LDVTF): We thought the IPO was priced too expensive and the stock was punished post-IPO. It has traded down 30% from its RTO round and its valuation is more reasonable now.

We do not recommend the following stocks for now:

MedMen (OTCQB:MMNFF) : Management showed greed and incompetency since the May RTO as the stock fell below listing price. CFO quit after top 3 execs got paid $10.5M in cash in addition to one of the highest salaries in the entire industry. The company's financials are a mess after posting consecutive quarters of staggering losses. We do not see near-term catalysts and consistent execution is the only way out for them.

: Management showed greed and incompetency since the May RTO as the stock fell below listing price. CFO quit after top 3 execs got paid $10.5M in cash in addition to one of the highest salaries in the entire industry. The company's financials are a mess after posting consecutive quarters of staggering losses. We do not see near-term catalysts and consistent execution is the only way out for them. Trulieve (OTCPK:TCNNF) : Single state focus is too risky and limits growth potential; Florida is becoming very crowded and Trulieve's market position will be challenged in the near-term. The recent entry into MA and CA is too little and too late in the grand scheme of things.

: Single state focus is too risky and limits growth potential; Florida is becoming very crowded and Trulieve's market position will be challenged in the near-term. The recent entry into MA and CA is too little and too late in the grand scheme of things. Others: We wouldn't recommend most of the small single state operators due to the significant business risk they carry. When you have a handful of stores it would be devastating to lose your license (Ascent Industries in Canada became the first LP to lose its license) or fail to win more licenses (Planet 13 (otcqb:PLNHF) announced that it didn't win any of the six retail licenses it applied in Nevada, leaving its Medizin store closed indefinitely). These stocks are more for investors that could handle higher risks and have the time and resources to conduct frequent diligence in order to stay current on their latest developments.

Conclusion

We are pleased to present our top picks for the cannabis sector in 2019. We hope we were able to provide a useful discussion on how to position your cannabis portfolio in 2019. We look forward to hearing your feedback and to continue providing unbiased analysis on the sector in the new year.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Editor's Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.