Investing in Cannabis Stocks for Everyone?

Posted on Tuesday, June 18th, 2019 Chris Markoch

Investors are always searching for the next big thing, which is why investment dollars move every day into stocks that promise to be the next Amazon or Google. For Wall Street and many retail investors in 2018 and 2019, those stocks are cannabis stocks.

Cannabis has become the irresistible force that continues to revolutionize the way many Americans are thinking about conventional medicine. Marijuana stocks are also drawing attention from investors. Some industry analysts are calling cannabis the “green gold rush”. Today, in America, cannabis is a $10.8 billion industry in America. Farmers are becoming millionaires as marijuana is becoming America’s leading cash crop. Entrepreneurs are opening cannabis dispensaries and the primary audience lining up outside their doors is senior citizens.

Data Suggest Americans Have Changed Their Minds on Cannabis 

That’s not surprising. Over 23,000 scientific papers have been released espousing the potential medicinal benefits of marijuana in managing pain and the potential breakthrough effects it can have on a range of medical conditions including insomnia and depression. The science behind these spectacular reports is growing awareness of the medicinal effect of the cannabidiol (or CBD) part of the marijuana plant, and how it is different from THC – the primary psychoactive ingredient in marijuana. As more investors have come to understand the science, objections about the potential effect of long-term usage are also beginning to change.

Despite Obstacles, Growth For Cannabis Stocks Could Explode

However, the irresistible force of hemp stocks is still facing what has appeared to be an immovable object - full legalization. Despite the fact that the majority of the United States have voted to approve medical marijuana, cannabis companies still face obstacles to growth. Many states have not approved the use of recreational marijuana, which is an important distinction as companies from Scotts Miracle-Gro to Coca-Cola and Constellation Brands look to market the CBD component of cannabis in hydroponics and soft drinks.

However, even without full legalization, the marijuana industry is expected to grow. In fact, it is estimated that the industry would grow to $50 billion in the next five years without full legalization. At the same time, many industry insiders are expecting that Congress will lift the prohibition on cannabis much sooner. Canada legalized the use of cannabis for medicinal and recreational purposes in late 2018. Not surprisingly, publicly traded cannabis companies in Canada such as Canopy Growth (the world’s largest by market cap) and Aurora Cannabis began to take off. Analysts are saying that when full legalization occurs (and they agree it is more a question of if then when) cannabis may become a $100 billion or even a $1 trillion dollar industry.

With that kind of growth available, it would seem that every investor should want to invest in cannabis. However, successful investing frequently comes down to balancing wants against needs. The reality is that the cannabis industry will be a volatile industry for some years to come and investors must balance that volatility against its growth potential.

Cannabis Industry Still Evolving 

For starters, the cannabis industry is only beginning to see the consolidation that typically fuels industry growth. This means that for every company like Canopy Growth and Aurora Cannabis that has a large market cap, there are other mid-cap and small-cap companies who have yet to show a profit and have less than certain futures. Already, the industry is starting to move into its next stage of development, highlighted by mergers and acquisitions, which is common in a developing industry. For example, in 2018, Aurora Cannabis completed the acquisitions of CanniMed Therapeutics and MedReleaf. All of which spells higher volatility than other industries, which may not suit the risk tolerance of every investor.

Also, like many of the tech startups that led to the dot-com bubble of the early 2000s, the cannabis business model is one that investors are only beginning to understand. Warren Buffett is an outspoken advocate for investing in what you know. The reality for most investors is that the industry is unique and the potential for growth is going beyond the desire to use CBD for medicinal purposes. Beyond the growers and dispensers, there are beverage companies that are looking to develop cannabis-infused drinks and companies such as Altria making a $1.8 billion investment for a 45 percent stake of Cronos. All of this activity means the market is presenting new opportunities on a regular basis. Which companies will be first to market? Which ones will be left behind?

At a more basic level, there is some concern that the growth may not occur at the projected levels. Although the Center for American Progress, a progressive public policy research, and advocacy group, citing that 68% of Americans support legalizing marijuana – there is still a vocal minority that is advocating for, at best, limiting the legalization of marijuana for medicinal purposes only. Analysts and investors are paying close attention to some of the major Canadian cannabis stocks which have a large price-to-sales ratio (around 5 times higher than other industries). This is leading some analysts to conclude that the projected growth for cannabis stocks is included in their current share price.

Bottom Line On Cannabis Stocks 

Cannabis and its legalization is one of the fascinating stories of 2019 and promises to be one of the industries that will be moving markets for years to come. As the story continues to unfold, investors should take time to educate themselves on both the benefits and the risks associated with this fast-growing industry. Cannabis is not going away, but as many investors have seen, the volatility in the industry is not likely to go away any time soon.

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