Up to this point, cannabis stocks have been trendy and red-hot thanks to global progress toward regulations that legalize weed. But, those same trendy and red-hot cannabis stocks have failed to gain mainstream traction because the regulation picture globally remains a hot mess, full of delays and complicated nuances. As such, cannabis stocks had their day in the sun, but that day is over. Most of them have traded sideways for the better part of 2018.
Just look at the U.S. and Canada Marijuana Stock Indices. Both of them are below where they were at the beginning of 2018. The Canada Marijuana Stock Index is actually more than 50% off its 2018 highs.
What’s next for cannabis stocks? Volatility. Volatility. And, more volatility.
In other words, if you can’t stomach volatility, steer clear of cannabis stocks. Meanwhile, if you’re looking to make a quick buck by playing some discrete event which could send pot stocks higher, good luck.
Having followed cannabis stocks, there are two things I’m pretty confident about here and now. One, these stocks are a wild bunch that won’t make any sustainable and big gains in the near future. Two, a handful of these stocks could be huge in a decade.
As such, I think the investment thesis on cannabis stocks is pretty simple. Don’t invest with lunch money. Only invest with money you don’t need for a while. And, if you can stomach near-term volatility, sprinkle exposure across different names and wait several years.
The Cannabis Market Could Be Huge
When it comes to the cannabis market, I firmly believe two things:
- Global legalization of marijuana isn’t a matter of “if”, but simply a matter of “when”.
- When fully legalized, the marijuana market could be as big, if not bigger, than the alcoholic beverage market.
Speaking to the first point, global regulation of marijuana is currently one giant hot mess. Two countries have fully legalized recreational use and possession of marijuana (Canada and Uruguay). But, in the bigger of those markets (Canada), the roll-out of brick-and-mortar marijuana locations is being delayed. Meanwhile, in the United States, nine states have legalized recreational marijuana, while twenty-plus others have legalized medical marijuana. But, in one of the biggest domestic markets (California), marijuana is largely failing to meet state safety standards.
Overall, the whole marijuana scene right now is just a mess. Having said that, markets are generally moving toward legalization. A decade ago, many doubted that we would have as much legalization as we do today. And, over the next decade, the amount of legalization that will happen globally will likely surprise individuals as world governments begin to look at the science of why marijuana isn’t all that much worse than alcohol for the average consumer.
Thus, I believe that the global legalization of marijuana isn’t a matter of “if”, but rather a matter of “when”.
Speaking to the second point, if cannabis becomes as legal as alcoholic beverages, then usage data points suggest that the cannabis market could be as big, if not bigger, than the alcoholic beverage market.
Roughly 33% of U.S. high school seniors drink on a monthly basis. That rate is down big from 50%-plus in the early 1990’s. Meanwhile, roughly 23% of high school seniors use marijuana on a monthly basis. That rate is up big from under 15% in the early 1990’s. If current trends persist, then marijuana and alcohol consumption rates among high school seniors should be roughly equivalent in five-plus years.
The U.S. alcohol market measured $120 billion in revenues in 2016. The U.S. cannabis market measured under $10 billion in revenues last year. Given that consumption rates of marijuana and alcohol are trending toward being equal, I reasonably see the U.S. cannabis market going from under $10 billion to over $120 billion over the next decade.
These Cannabis Stocks Are the Most Likely Winners
I have very little doubt that the global cannabis market will be huge over the next decade. I also have very little doubt that much of those gains won’t happen over the next six to twelve months. Instead, most of this growth narrative will likely play out after 2020.
But, I am doubtful as to which cannabis stocks will be the biggest winners when this market explodes. Right now, it feels somewhat like a lottery, considering just how many cannabis stocks are out there. Plus, no one really knows where the market is going to go from month to month, so projecting growth for these cannabis stocks is a rather impossible task.
That being said, there are a few cannabis stocks that stand out from the pack due to their size, reputation, track record and resources. The first is GW Pharmaceuticals (NASDAQ:GWPH), the global leader in cannabinoid medicines. The company focuses more on the medical marijuana side of the market, and that is where growth will likely come first, especially in the U.S.
On the Canadian side of things there is Canopy Growth (NASDAQ:CGC). This is the biggest cannabis company in Canada, and the one best positioned to get a boost once recreational cannabis sales start happening in October 2017. Because the Canadian market is the first of its kind, Canopy will gain experience over the next twelve to eighteen months in selling recreational cannabis. That experience can be used as leverage to gain market share in other markets as they legalize.
Outside of GWPH and CGC, there are a handful of other U.S. and Canadian cannabis stocks that could get a boost over the next decade as the cannabis market goes from nascent to full-grown. Those stocks include Aurora Cannabis (OTCMKTS:ACBFF), CV Sciences (OTCMKTS:CVSI), and MariMed (OTCMKTS:MRMD), among others. But, I have less confidence in these stocks as I do the big guys, mostly given their reputation and track record.
Bottom Line on Cannabis Stocks
In ten years, the cannabis market will be ten-fold the market it is today, and many cannabis stocks will fly to the moon.
But, those gains won’t happen to every cannabis stock. Instead, massive gains will be limited to a select few. And, even where the big gains do happen, most of the upside won’t happen until down the road.
As such, I think the best move with cannabis stocks is simply to sit and wait. No need to buy yet. Regulation will eventually clear up, and the winners will eventually emerge. That is when you want to buy cannabis stocks. Not here with so much uncertainty present.
As of this writing, Luke Lango did not hold a position in any of the aforementioned securities.
