Boom-Bust Update — Time to Get Into Cannabis
- The bear market in cannabis is finally over.
- Cannabis could be legal in 40 states by year-end. And sales are projected to grow to $25 billion.
- Matt Badiali shares an easy way to profit from the next run-up in pot stocks.
The ugly round trip for cannabis stocks is over … at least for the good ones.
Money is coming back into cannabis for the simple reason that people want the stuff. U.S. sales in 2018 generated around $8 billion. They project to be over $25 billion by 2022. That’s 200% growth in just three years.
That means retailers can make money. It means growers can make money. It means shareholders can make money too.
I see huge opportunity in this sector as it moves from small speculation to full operation. Don’t expect a gazillion-percent gain in the next six months … but I do believe we’ll see a couple of these companies return over 1,000% in the next couple of years. The opportunity is just that big.
And now is the perfect time to buy. Take a look at this chart:
This is a classic boom-and-bust chart. In this case, it’s the Horizons Marijuana Life Sciences Index ETF (Toronto: HMMJ).
The clock has literally been reset on the whole industry. HMMJ rose from CA$8.50 per share in summer 2017 to peak at nearly CA$25 a year later. That’s a 194% gain in a year … for the entire sector.
Many of the smaller, more speculative stocks did much, much better. For example, MediPharm Labs Corp., a small, specialized cannabis extraction firm, saw its share price jump 250% in the first five months of 2019.
The Bear Market Has Run Its Course
However, as you can see, the cannabis sector spent most of 2019 in a grinding bear market. Investors fled as the companies didn’t meet outsized promises. Some of the expectations were crazy, considering the U.S. market is a patchwork and Canada was slowly rolling out legal usage.
As quarter after quarter of losses rolled in, it began to knock investors out of the sector. Many took big losses after buying in high and selling out low.
A year ago, social media was full of cannabis touts crowing about the latest initial public offering or the next big deal. Today … crickets. Most pundits scoff at the “pot bubble” from last year.
And while it was a bubble, there is a thriving business underneath it. And that business is now cheap.
One major headwind was a lack of capital. Cannabis companies can’t just go borrow money, because it isn’t a sanctioned business. While it may be legal in places such as Nevada and California, it’s illegal on a federal level. And that means banks want nothing to do with it.
Legalization Will Drive Cannabis Stocks Higher
Some companies, such as Trulieve Cannabis Corp. and Green Thumb Industries Inc., found ways to issue debt. They tapped fixed-income markets for capital to grow.
And the market continues to grow:
- Missouri just began issuing medical marijuana licenses.
- Both New Jersey and New York will vote on legalization in 2020.
- New Mexico’s governor supports a bill legalizing adult-use cannabis.
- Arizona will vote for the second time on legalization. The state rejected legal cannabis in 2016.
Internationally, Mexico is on track to legalize adult use this spring.
That growth, along with steadily improving fundamentals, will bring serious investment to the sector this year. Whether it’s through traditional lenders, family offices or hedge funds, capital will come back to this sector in 2020.
A simple way to get exposure to this sector is the ETFMG Alternative Harvest ETF (NYSE: MJ). This exchange-traded fund (ETF) holds the biggest names in cannabis. It’s a great way to play the coming bull market.
Are you already invested in the cannabis sector? Let me know by taking my twitter poll:
Do you own any cannabis stocks?
— Matt Badiali (@MattBadialiGuru) January 24, 2020
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Editor, Real Wealth Strategist