A couple of decades ago, massive ad campaigns decried cannabis as a dangerous drug. Whether as a gateway or a danger in itself, it was demonized and it just seemed common-sense to stay away from it for many people.
Now, cannabis is legal in most states either for medical or recreational use. Only in Idaho and South Dakota is its use totally criminalized for any purpose, a massive turnaround from bygone days. State legislators are seeing the benefit of it as a source of tax revenue, and for consumers, legalization means great security, variety, and generally, quality. If we assume that legalization has a creep-effect, it won’t be long until it is legal across the country, making cannabis stocks a potentially great investment in the long run.
1. Strong & steady demand
Across states like California and Colorado, where cannabis is legal both for medicinal and recreational uses, there has been a boom since legalization. It is possible that this demand already existed in the days when the drug was criminalized and it has just come out of the shadows, so to speak. Indeed, even in the face of the headwinds the entire economy is running into with the COVID-19 pandemic, the fledgling sector has reported record growth in sales of between 20-25% across all locations as people seek new ways to stay home and chill out.
Jane Technologies, the e-commerce platform for cannabis, reported a surge of some 142% in the month of March. As with other legal drugs, like caffeine and alcohol, cannabis seems to relatively price elastic, and won’t be the first thing that users will cut back on when finances are restrained. In California alone, the legal cannabis sector was worth $3.1 billion in 2019, and projected to grow to $7.2 billion by 2024.
2. Cheaper valuations
Despite the existing demand and growth potential of cannabis as a legal substance, both medicinal and recreational, some investors are reticent. There are probably certain cultural explanations for this related to anti-cannabis propaganda of bygone days. Another problem is that many companies were, for the most part, heavily indebted, cash-poor, and richly valued before COVID-19 hit. Now, however, like many others, their stocks are taking a beating.
That means opportunities to buy into some of the big names in the sector like Canopy Growth (NYSE: CGC) Aurora Cannabis (NYSE: ACB) and Cronos (NASDAQ: CRON) are trading cheaply compared to a few months ago, though some of the price/sales ratios are still quite high.
Moreover, since agricultural activity won’t be badly affected by the restrictions in place, and supply continues in the form of deliveries, the industry is far less affected than most. Particularly if we consider that illegal operators who continue working in states like California won’t be able to continue their operations without drawing attention to themselves, it is a good time for legal cannabis. Consumers who were previously still going with their dealer may “see the light” so to speak.
3. Long-term growth.
With all of this in mind, the growing acceptance of cannabis is likely to make it a sector set to experience growth. Not only because of legalization-creep, but also the host of other uses and products that cannabis itself has the potential to be used for.
We are all by now familiar with CBD and medicinal cannabis, but there is also a host of uses of cannabis and hemp fiber which were popular prior to the demonization of cannabis as a drug. In a world crying-out for alternatives to packaging, cannabis is a potential solution, and that only as a by-product. There is also an entire section of beverages using CBD as an alternative to alcohol, promising many of the pleasant aspects of alcohol without the hangovers and with far fewer calories than alcoholic beverages generally.
There is even a THC-based alternative to beer, which purports to be healthier than the real thing, with just as good of a buzz. So it looks like, from many angles, the future is bright for cannabis. Just how big is hard to say, given the uneven rollout of legalization across states, and the enduring loyalty of many consumers to their illegal dealers. But this can be expected to change as consumers learn the advantages of legally produced and supplied cannabis. What we can expect is a flurry of mergers and acquisitions as the sector becomes consolidated. The trick will be making the right bets now.
MyWallSt operates a full disclosure policy. MyWallSt staff currently hold long positions in companies mentioned above. Read our full disclosure policy here.
Contributing Writer at MyWallSt
Ronan is an admirer of companies like Patagonia, who combine style with functionality, and a pioneering approach to mitigating their impact of society and the natural world.