High Stakes - The Other Green Stocks
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Intro |
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2023 is going to be a huge year for potheads across the country. States are legalizing weed left and right, and some places like New York are even opening up dispensaries for the first time. |
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The cannabis industry is still pretty new, so a lot of investors are trying to jump in before it becomes too popular. But investing in cannabis stocks isn't exactly a sure thing. |
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Even though weed is legal in some states, it's still illegal on a federal level, which means major banks and credit card companies don't want anything to do with cannabis companies. And sky-high taxes, fragmented state markets, and lack of access to capital make it practically impossible for any cannabis companies to turn a profit. |
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Universe |
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It's been a long, hazy road for marijuana in the United States. For most of the last century, getting your hands on a joint meant either scouring sketchy alleys or lurking in the dingy bathroom of an East Village coffee shop. |
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But with the legalization of medical marijuana, things started to look up for pot enthusiasts. Suddenly, legitimate companies were popping up left and right, offering all sorts of cannabis-based products for people with valid medical reasons. |
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And then, in 2014, recreational marijuana became legal in Colorado, and the floodgates were opened. Now, weed is legal in 21 states, and companies like Curaleaf and Canopy Growth are setting up shop and selling their wares to anyone over the age of 21. |
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But it's not all sunshine and rainbow-colored bongs for the cannabis industry. Companies are still fighting to change the negative perception of marijuana, and are offering a wider variety of products, like edibles and CBD-infused beverages, to appeal to a wider audience. |
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History |
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Even though marijuana is becoming mainstream, cannabis companies are still stuck on the fringes of the financial system. They can't use traditional banks, and customers have to pay in cash. |
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The SAFE Banking Act was introduced in Congress in 2019, which would allow banks to work with cannabis companies without fear of being charged with money laundering. The House of Representatives passed it, but the Senate has dropped the ball three times now. |
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Since the year 2009, the cannabis industry in the United States has experienced significant growth and evolution. Here is a brief timeline of notable events and developments: |
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2009: |
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2012: |
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2014: |
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2015: |
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2016: |
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2017: |
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2018: |
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2019: |
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Public Companies |
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The table below shows five publicly traded cannabis companies. They all at least somewhat operate in the United States, even if they’re listed on a different country’s stock exchange. All companies have significant growth prospects and are likely to remain significant players in the industry going forward. |
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Curaleaf |
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The largest cannabis company in the United States, Curaleaf Holdings, captures the evolution of the cannabis industry over the past decade or so. |
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Curaleaf is an ideal case study in where the cannabis industry may be going, too. The company started out as a small medical cannabis dispensary in Portland, Oregon. Curaleaf quickly expanded to multiple locations in Oregon and Massachusetts, and it didn’t take the company long to branch out and grow its own weed |
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In 2018, Curaleaf made headlines when it became the first cannabis company to go public on the Canadian Securities Exchange. This allowed the company to raise capital for further expansion and acquisitions. And CuraLeaf hasn't stopped there, it's been on a roll acquiring other cannabis companies left and right. |
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The company has a strong focus on research and development, and has partnerships with several universities to study the potential therapeutic benefits of cannabis, or maybe even figure out the best strains for Netflix binges and pizza parties. |
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Curaleaf has become the largest cannabis company in the United States, and for good reason. Most cannabis companies either go all-in on growing their own stash, while others stick to operating dispensaries. Curaleaf does both. |
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Curaleaf’s scale and brand make the company an especially intriguing investment. They’ve become the Walmart of weed. They have it all, from flower to vapes to drinks and edibles. |
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When it comes to product offerings, both innovation and brand matter. An established brand goes a long way in establishing trust and legitimacy - perhaps even more so in the cannabis space. Consumers are more likely to buy a new product from an established brand, known company fosters trust and legitimacy. Curaleaf is well-positioned to capture a large market share for new product offerings. |
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Brand reputation especially matters for CBD offerings. Consumers who gravitate to CBD products are by nature skeptical - they want the therapeutic benefits of cannabis usage but they don’t want to get high. A company with a strong and well-recognized brand like Curaleaf is therefore well-positioned to reach first-time consumers. |
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Curaleaf even has its own stores and partners with other retailers to make sure everyone can get their hands on some green. The company operates in 21 different states and manages 26 cultivation sites across the country. Curaleaf also runs 145 of its own dispensaries and partners with over 2,000 other third-party distributors to distribute the goods. |
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Bulls |
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If you're not afraid to take a risk and can handle a little bit of a wild ride, investing in cannabis companies might just be the green rush you've been waiting for. |
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With the global cannabis market predicted to grow at a steady 20% per year until 2031, when it will be worth a staggering $149 billion, it's hard not to get excited about the potential for high returns. |
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There’s significant value in the cannabis industry if you’re willing to look past the short-term hurdles cannabis companies face and can stomach high volatility. |
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Catalysts |
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The potential is there for the cannabis industry to evolve into a $100 billion-plus market. But the industry is still in its infancy. Experts think the industry would take off if cannabis became legal at the federal level. However, even if marijuana remains illegal at the federal level, cannabis companies may have a clear path to profitability if they are given sufficient access to capital and permitted to engage in interstate trade. |
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But right now, cannabis companies are unprofitable. Since marijuana is illegal at the federal level, cannabis companies are treated like narcotics traffickers under the tax code. Cannabis companies are also forbidden from transporting their profits across state lines. |
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So in all the 21 states Curaleaf operates in, the company has to build separate farms, factories, and stores. If Curaleaf could consolidate farms and factories to a handful of locations, they could reduce costs significantly. It all centers around economies of scale, and it’s tough to turn a profit when operations are decentralized across states. |
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Perhaps the biggest barrier for cannabis companies to turn a profit? Their exclusion from the mainstream financial system. A lack of access to capital is a significant handicap for cannabis companies. Cannabis stocks skyrocket every time passage of the SAFE Act gains momentum. |
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Most policy experts think it’s a matter of time before marijuana is legal at the federal level. But under current conditions, cannabis companies face a hazy short-term path to profitability. Without access to a bank account or the ability to engage in interstate commerce, cannabis companies are currently stuck in a state of limbo. |
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Bears |
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Bears think there’s too much legal uncertainty to invest in the cannabis industry. Technically, possession of marijuana is still a federal crime in all 50 states. Federal regulators could shut down all dispensaries and put cannabis companies out of business if they wanted to, but cracking down on marijuana is simply not a pressing political issue to either political party. |
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So the possibility that cannabis stocks could go to $0, no matter how unlikely, is still there. Additionally, the industry could be subject to changes in laws and regulations that could negatively impact companies and investors. |
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Furthermore, the SAFE Act makes it difficult for any cannabis company to run an effective business. In such a high-growth industry, cannabis companies need access to capital for innovation and growth. It’s simply too difficult for cannabis companies to operate effectively to pick out a sure-fire winner. |
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The cannabis industry is a lot like investing in crypto - both are highly volatile and run the risk of zero. Investors with a lower risk tolerance or time horizon are justified in staying away from cannabis stocks. |
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Recommendation/Conclusion |
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The cannabis market is rapidly growing, and is here to stay. That said, the financial hurdles cannabis companies face pose unique challenges. |
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The value premise for investing in the cannabis industry is that you get to be a part of a rapidly growing industry while it's still in its infancy. You're essentially buying low because marijuana is still illegal in most states and cannabis companies aren't exactly raking in the dough. So why not hop on the green train and watch your investment grow? |
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Investing in the cannabis industry isn’t without risks, though. The barriers faced by cannabis companies make it difficult for them to sustain their business, leading to uncertainty among investors about which companies are reliable. |
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We suggest that to minimize risk, investors should either invest in a well-established company like Curaleaf or invest in an industry ETF like "MJ" (ETFMG Alternative Harvest ETF), which provides a diverse range of investments and can protect against potential losses from individual companies. Any investment in the cannabis industry is bound to be volatile, but there’s room for high returns depending on your risk tolerance. |
