Just a decade ago, the idea that you might possibly be able to invest in a business that produces, distributes, or sells cannabis products was pretty much unthinkable. We were on the verge of legalization in several states and the US Justice Department had declared that they wouldn’t pursue enforcement of federal prohibition in states that had decided to allow cannabis sales, but there were no investment opportunities for the average person.
Just a few years later, Canada approved the production and sale of cannabis for adult-use across the entire country. That opened the door to exchange listings of public cannabis companies that operate entirely in Canada. The NYSE and NASDAQ won’t allow the listings of companies who are not in full compliance with the laws in the specific jurisdiction(s) in which they do business.
That created a bizarre grey area in which US investors could buy the shares of companies that deal with the actual cannabis plant in Canada, and they can buy the shares of companies that provide ancillary products, support and even real estate deals to cannabis companies inside the US – but they can’t buy shares of firms that actually “touch the plant” in the US, and are thus prohibited from getting a listing on a major exchange.
The share prices of the exchange-listed cannabis stocks have already experienced several periods of boom and bust over the last several years – and we’re not even at the main event yet. US legalization is close. Imagine how much the landscape will change when 330 million more potential customers get to start choosing what kind of products they’re going to buy.
Inefficiency Creates Opportunity
The fact that the investable opportunities have been complicated and often difficult to discern is actually part of the appeal of the whole industry. If everything were sorted out, we could expect the markets for these shares to be just as efficient as the market for any other plain-vanilla commodity item. It’s literally because we’re dealing with so many factors that are currently unknowable that true opportunity exists.
We have to dig a little deeper and make some educated guesses, but these are the moments that can provide big profits for investors with a healthy appetite for sensible risk. Some of the previously successful producers will continue to grow and become tomorrow’s behemoths. But some of them will fade into obscurity or find themselves acquired for pennies on the dollar.
Most importantly, new ventures that aren’t even on anyone’s radar yet will almost certainly emerge. They’ll provide products and services that haven’t even been invented yet and become the new industry leaders. Early investors will make outsized returns for recognizing the profit potential early.
Continued . . .
Time to Buy Pot Stocks!
After waves and waves of marijuana legalization, this industry has held true right through the pandemic lockdowns. Now fresh from a clean sweep of 6 election referendums and with proposed federal legislation about to open up the entirety of the U.S., it’s expected to explode from global sales of $24.6 billion in 2020 to an expected $86 billion by 2028.¹
Zacks recently closed a +147.0% marijuana trade, and is currently riding 5 double and triple-digit gains that should still have a long way to run. Plus, new stocks are being lined up that could rival or surpass these performances.
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“Drug Dealer” Profits
Part of the excitement that has fueled speculative rushes to invest in cannabis companies is the notion that dealers of illicit drugs make outsized profits compared to the purveyors of more ordinary products. Investors piled into cannabis stocks expecting that they could enjoy a share of those outsized profits without taking the risk of being criminally prosecuted for violating the law.
Unfortunately, though it might seem to make intuitive sense, there are some significant flaws in that thesis. Those investors have been disappointed to find that the cannabis companies – even those with market capitalization well into the billions of dollars – have to deal with the same price competition, margin compression and supply-chain headaches as much more traditional businesses. The wholesale prices for dried cannabis flower have declined significantly as more and more sophisticated enterprises get involved in production.
In a nutshell, a street level drug dealer* might enjoy higher gross margins than other businesses, but the premium is due almost entirely to the risk of civil and criminal liability that they are accepting. Take away the risk and it starts to look a lot like any other business that grows and sells an agricultural product.
(* Anyone who has read the excellent “Freakonomics” series of books by the economists Steven D. Levitt and Stephen J. Dubner is already familiar with the notion that the enterprise of illicit drug dealing is remarkably similar to something more ordinary like a fast-food business. The authors’ observation is that a few people at the top of the food-chain make the lion’s share of the profits, but for a much larger number of participants in the market, it ends up being a job just like any other – except that it includes the catastrophic risks of being incarcerated or suffering physical harm at the hands of your competitors.)
Once cannabis is broadly legal across the US, we’re not going to see the type of margin premiums that are enjoyed by the illicit markets.
And that’s a good thing!
The big opportunities are going to be in sorting out what products and services are going to be big sellers before everyone recognizes them. In 2007, a new public company called Lululemon Athletica (LULU) was successfully selling yoga-inspired athletic garments – and trading for $14/share. Those shares have appreciated more than 2,200% since then. Spotting opportunities like those early on is what really successful investments are made of.
And there are going to be plenty of those in cannabis!
It’s Not Alcohol or Tobacco
It’s very much human nature to look at a new situation (like the nascent cannabis industry) and draw comparisons to something similar that you’re already familiar with in order to make an educated guess about what you can expect.
The most obvious analogue for a legal but strictly regulated market for a mind-altering substance are alcoholic beverages and tobacco. There are definitely some similarities, but it’s important to keep in mind that the customer market for legal, recreational cannabis is likely to look different in some significant ways.
Prior to state-level legalization, a consumer who wanted to consume cannabis (and was willing to take the legal risk of obtaining and possessing it) had no choice but to deal with the illicit markets. The product most often took the form of a container of dried cannabis flower that was intended to be lit on fire so the smoke could be inhaled to ingest the active compound – Delta-9 Tetrahydrocannabinol.
As legal, retail marketplaces for cannabis began to appear, that was still the format that dominated most recreational sales – dried flower products. It might have been presented in an inviting, clean and well-lit storefront environment, but the product that those consumers walked out with was still most likely to be very similar to the “bag of weed” that they were buying before. It was so similar in fact that the illicit markets didn’t cease to exist, even in locations where consumers had the option to buy a high-quality product from a trusted source. In some cases, taxes were part of the issue, with price-sensitive customers choosing to stay with the black market because it was cheaper.
That’s largely going away. Early retail sales in the nation’s most populated state of California were disappointing, with less legal cannabis sold in 2018 – after recreational legalization – than was sold the previous years when it required a medical prescription but was taxed at much lower rates (or not at all.)
The gap has closed considerably since then. Roughly ¾ of the cannabis sold in California now goes through legal channels and the state – along with counties and cities – are collecting huge tax revenues.
That stands to reason. Let’s say you enjoy an evening martini. Would you buy moonshine that your neighbor distilled in his garage just to save the few extra dollars of sales tax charged on your favorite brand of vodka from the supermarket? Probably not… It may take a while, but the cannabis market is headed in exactly the same direction.
Though accurate figures are difficult to obtain because you’d have to rely on self-reporting of behavior that still has somewhat murky legal status in some places as well as continuing stigma, it’s reasonable to assume that the consumers who are buying dried flower products at a licensed retail location are the same people who used to buy the same product in illicit markets.
Enlightened local governments are realizing that regulating the quality and purity of that product and collecting sales taxes on something that was mostly likely going to happen anyway is a win-win, both financially and in terms of public safety.
But…those consumers represent a small segment of the overall population. There are hundreds of millions of Americans who have exactly zero interest in smoking cannabis. Especially as we continue to deal with the effects of a pandemic in which the worst symptoms were respiratory, lighting something on fire and inhaling the combustion is an increasingly unattractive proposition for most people.
That creates one of the most exciting parts of the (still very new) industry. The innovative products that will allow new customers to try a safe, precise dose of the active compounds in the cannabis plant are going to be the driver of future profits in the recreational market.
Early in the game, we’ve already moved past products that simply provide THC. New consumers (those same people who would never consider smoking a joint) can buy products that contain precise levels of THC and the non-intoxicating Cannabidiol (CBD), as well as other “terpenes” that are present in the plant and create the pleasant experience that cannabis consumers desire.
They’re in edible products and beverages that taste good. Some that contain Cannabinol (CBN) promote restful sleep with little or no perceptible impairment. How big do you think the potential market is for a completely safe, plant-based, non-addictive product that doesn’t make you “high” but helps you get a good night’s sleep?
This is where the growth is.
This is why we think the cannabis industry is still in the very early innings.
Being on top of the next huge trends that bring cannabis products to the masses in formats that are desired and demanded by tens of millions of average, everyday people is how the big money is going to be made going forward.
And that’s what we at Zacks are focusing on. There are numerous cannabis ETFs that own a cross-section of stocks in the industry that you can simply buy and forget about for a while.
Instead, in our Marijuana Innovators portfolio, you’ll find shares of the companies that are on the cutting edge of where the industry is headed in the future. Simultaneously, we’re also staying abreast of the legal developments that are going to turn today’s thinly traded OTC stocks in the US into the powerhouse exchange-listed companies of tomorrow so that you can act first – before everyone else is already on board.
How to Pursue the Early Profits
We’ve been monitoring political developments very closely as well as tracking individual stocks.
This space looks to EXPLODE from $24.6 billion in 2020 to $86 billion by 2028.¹ Yet only a few growers, pharmaceuticals, financial firms, suppliers – both established and start-ups – are the true innovators and offer exceptional profit potential.
So if you don’t want to devote the constant attention and painstaking analysis to find these often little-known tickers, we can find them for you.
You’re invited to take part in the portfolio service I’m directing, Zacks Marijuana Innovators.
Our approach is responsible and vigilant but we look for aggressive growth. Recently, it closed a +147.0% trade. Plus, it has uncovered pot-related stocks that shot up +152.2%, +81.3%, +60.9%, even +240.8% in as little as 5 months.² And all of these could have a long way to run.
I’ll alert you what and when to buy and when to sell. I’ll also brief you on breaking market news that directly affects your investments.
Our choices have been limited over the past few years because of the legal status of cannabis in the US, but the 2020 elections brought a clean sweep of 6 pot referendums in 5 states, several states including New York have passed their own legalization initiatives, and more legislation is pending. With federal legislation recently reintroduced with broad and diverse support, many US-listed companies are bound to emerge and current stocks could skyrocket.
Alert: New Stock Posting After Market Open Monday
I’m planning to add a pharmaceutical stock to the portfolio. This is a big company with much bigger upside thanks to the fact that it just acquired a major cannabis pharma player.
In other words, you can be one of the very first to get in on this new addition to Marijuana Innovators. Follow all our live buys and sells for the next 30 days.
We can’t let everyone in, so your chance to gain access must end at midnight Sunday, June 6.
See Zacks’ Latest Marijuana Trades Now >>
David Borun is Zacks’ Cannabis Stock Strategist. He applies 20 years of trading expertise plus concentrated industry study to the direction of our unique portfolio service, Zacks Marijuana Innovators.
¹ Grand View Research
² As of 6/2/2021. The results listed above are not (or may not be) representative of the performance of all selections made by Zacks Investment Research’s newsletter editors and may represent the partial close of a position.
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