Marijuana Stocks: On a Roll Again
Billionaire super-investor Warren Buffett probably put it best: “Opportunities come infrequently. When it rains gold, put out the bucket, not the thimble.”
For marijuana investors, it’s time to put out the bucket. After a tough 2019 and shaky 2020, the cannabis sector has regained momentum.
As a slew of legal initiatives in the U.S. and around the world seek to legalize cannabis, investors are getting excited again about marijuana stocks. We witnessed a brutal shakeout in late 2019, when (as I predicted at the time) the overvalued cannabis sector had its day of reckoning and crashed.
Marijuana stocks bottomed out in the first half of 2020. Since the November 2020 election, they’ve been on fire. Marijuana-friendly Democrats currently control the White House, the U.S. Senate, and the U.S. House.
After a round of post-crash mergers and acquisitions (M&As), as well as bankruptcies, the industry is in leaner, fitter shape. More pot companies are hiring seasoned corporate managers. Consolidation combined with rising demand for marijuana products has boosted the top and bottom lines of quality marijuana companies, lifting their share prices. The doom-and-gloomers were wrong.
The benchmark Amplify Seymour Cannabis ETF (CNBS) has greatly outperformed the S&P 500 year to date, 52.44% versus 12.53% respectively (see chart).
CNBS is an actively managed exchange-traded fund (ETF) that provides exposure to the cannabis industry by investing in securities of companies that generate 50% or more of their revenue from cannabis and hemp products and services. This ETF is an excellent proxy for the entire cannabis/hemp financial ecosystem.
Marijuana momentum plays…
Think of current bullish conditions as the second wave of the green rush. The restructured marijuana industry affords opportunities for investors who pinpoint plays that benefit from the momentum of M&A and new venture partnerships.
Some of the biggest marijuana profits can be found by identifying smaller, specialist companies that are likely takeover targets by mega-cap food, beverage, and medical multinationals.
The Gartner Hype Cycle
For insights on how to exploit this investment method, let’s turn to the Gartner Hype Cycle (see graphic).
The cycle is a graphical presentation developed and used by technology research and advisory firm Gartner for representing the maturity, adoption and social application of specific technologies.
Each Hype Cycle describes five crucial phases of a technology’s life cycle. For our purposes here, let’s consider marijuana to be a technology. As a product relatively new to the business and consumer mainstream, marijuana has been as revolutionary as any emerging technology, especially in the field of pharmaceuticals.
1) Technology Trigger: A technology breakthrough kicks things off; excitement builds.
2) Peak of Inflated Expectations: Early publicity spawns a flurry of success (and failure) stories. Some companies adapt; others fall by the wayside.
3) Trough of Disillusionment: Interest diminishes as reality fails to live up to the hype. A shake out ensues, but the smartest early adopters survive and continue to invest and experiment. (This phase describes the marijuana industry in 2019.)
4) Slope of Enlightenment: The technology becomes better understood and implemented. Second- and third-generation products emerge.
5) Plateau of Productivity: Mainstream adoption takes off.
The Hype Cycle can be incorporated into your investment toolkit to take advantage of momentum. Fear and greed always move markets, but in the early developmental stage of a technology where information can be lacking, the effect of these emotions are considerably amplified in share prices.
If an industry is in the hype phase, you could decide to take on more risk by riding the momentum. Marijuana companies already have passed through their “hype” period and now occupy phases four or five, which in turn translates into sustainable, long-term growth.
Of course, some companies will be winners; others won’t. Looking for ways to profit from the new momentum of cannabis investments? Click here for our free report.