Pot Stocks: Buy When There’s Blood in the Streets
Marijuana investors are saying “good riddance” to 2019.
It’s no secret that the marijuana bubble burst in the latter part of last year, reminiscent of the dot-com bust of 2000. But don’t let that scare you from marijuana investing. Remember the old investment adage: the time to buy is when there’s blood in the streets.
The dot-com crash traumatized many investors and permanently frightened them away from technology stocks. That’s a pity, because these investors missed out on massive profits when the tech sector came roaring back. The same dynamic is at work with cannabis.
Admittedly, the marijuana shakeout has been brutal. Led by industry giants Aurora Cannabis (NYSE: ACB, TSX: ACB) and Canopy Growth (NYSE: CGC, TSX: WEED), bellwether firms badly missed consensus projections in their operating results.
Excessive optimism in the cannabis sector finally faced its day of reckoning. During the industry-wide correction last year, several marijuana companies lost most of their value. As you’d expect, penny stocks were the hardest hit. Many of these small fry saw their share prices go straight to zero.
The following chart compares the one-year price movement of the benchmark Horizons Marijuana Life Sciences Index ETF (HMMJ) with the S&P 500 (as of market close January 29). The carnage among pot stocks has been ugly:
Sure, cannabis sales in the U.S. and Canada have soared in recent years, as legalization accelerates. But the “green rush” also has generated frenzied competition, akin to gold miners flocking to San Francisco during the gold rush of the 19th century.
This explosion in entrepreneurial activity has created a glut of marijuana supply and products. Despite legalization and proposed bills to ease lending, marijuana remains a highly regulated industry. Operating costs are high and access to capital is limited. Many marijuana companies are plagued by inexperienced managers.
The Achilles Heel for the entire marijuana industry is commoditization. Despite its mystique, marijuana is simply a plant, which makes it a commodity. When most companies in a single market are selling the same commodity, there’s little to distinguish their products. Price wars erupt; profit margins shrink.
Will the entire marijuana industry go bust? Absolutely not. Print out this sentence, laminate it, and put it in your wallet: The marijuana boom still represents one of the greatest investment opportunities that you’ll ever see in your lifetime.
The global trend toward marijuana legalization is unstoppable, especially as federal and state governments get accustomed to the tax revenues from marijuana sales. You can reap exponential profits by investing in “canna-business.”
But not all marijuana stocks are created equal.
We’ll continue to see consolidation in the marijuana industry, as dispensary chains, small-cap biotechs, growers, and other marijuana players either fold, sell off their components, or get acquired.
However, a culling of the herd was to be expected and it’s a healthy development. It mirrors the cyclical progression of any new and disruptive industry. Among the survivors will be those marijuana companies that have found a way to provide a proprietary, value-added component to cannabis that gives them a competitive edge in a crowded marketplace.
Don’t forget hemp…
And don’t give short shrift to marijuana’s cousin, the hemp plant. Hemp faces booming demand, in large part because it’s the source for cannabidiol (CBD) in many non-psychoactive products. The CBD market will grow to $2.1 billion in consumer sales by 2020 according to the Hemp Business Journal, with $450 million of those sales coming from hemp-based sources.
CBD is all the rage and it’s getting mixed into a wide range of mainstream consumer products, from food to medicine to cosmetics. Problem is, much of the marketing that touts the virtues of CBD is hyperbolic if not downright false.
The hyping of CBD has attracted the ire of regulators, with the U.S. Food and Drug Administration recently cracking down on CBD claims. Despite rising demand, you can expect the CBD market to eventually mature and level off.
That said, marijuana legalization will continue apace in 2020, with several more states on track this year to legalize pot. We’ll also see an increasing number of seniors use medicinal pot to ease their aches and pains.
Older pot users are likely to make the crossover to recreational use, as the stigma against pot continues to evaporate. Baby Boomers remember marijuana from their youth and they’re rediscovering it. Meanwhile, younger generations have scant qualms about pot.
Gallup polls show national support for legalization has soared from 44% to 66% during the last decade. How big a cultural shift does that represent? When Gallup first asked Americans the question in 1969 (when Richard Nixon was president), only 12% at that time said it should be made legal.
Another big trend for 2020 and beyond: consumer giants will continue to buy smaller outfits, to integrate branded pot products within their supply chains for mainstream retail sales.
Deep-pocketed multinational beverage and food companies are scouring the landscape for makers of cannabis-infused drinks and edibles. This buyout activity also will give smaller marijuana companies the marketing savvy and financial wherewithal to expand.
With so much volatility in the marijuana market, how can you pinpoint the best pot stocks? That’s where the experts at Investing Daily can help.
We’ve put together a presentation that steers you toward the highest-quality value plays in the cannabis sector. But you need to act quickly, before the investment herd discovers these hidden gems and bids up their share prices. There’s blood in the cannabis streets, so the time to buy is now. Click here for details.
John Persinos is the editor-in-chief of Marijuana Investing Daily. You can reach him at: firstname.lastname@example.org