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Is It Time To Buy Cannabis Stocks?

As a stock investor it has been impossible to miss the wild volatility of the Cannabis sector in 2018.  So is it time to buy these companies?  I have two words for you – Inevitability and Optionality.

First though some perspective is in order.  Looking just at overall performance for 2018 misses the drama of what occurred in 2018.  This past year saw wild gains up to around the time of legalization of recreational marijuana in Canada and then a painful selloff.  Here are some examples: Canopy Growth (TSX: WEED.TO) opened 2018 at $30.69. From there it was up almost 150% by October 16th.  Painfully from that peak it declined 52% to C$36.61.  The monster of them all in terms of swings was Tilray (NMS: TLRY). From an open price of $22.39 to its peak of $300.00 the shares were up an astounding 1,200% and then a 76% decline from the peak to a year end close of 70.54. 

Inevitability 

The run-up was big.  The fall was steep.  The future, however, is showing the inevitability of increasingly wider adoption and acceptance of cannabis.  This means an ever growing market for a long time to come. 

Currently Canada and Uruguay are the only two countries at the national level to allow for the legal possession and sale of cannabis.  According to Wikipedia a further 27 have decriminalized possession with varying restrictions or limits.  The United States is lumbering towards legalization.  Currently cannabis is legal in 10 States and decriminalized in 13 other states

Public pinion has shifted strongly in favor of legalizing cannabis with approximately 2 out of 3 Americans supporting legalization.  Being in the middle of a Presidential cycle likely makes it a long shot to see full national legalization in the next 2 years.  But the market will do what it does best – anticipate.  Each new state to legalize either recreational or medical use will add to the pressure for full national legalization.  The stock run-up prior to legalization in Canada was big. 

Watch out when Uncle Sam finally starts drafting a bill to follow Canada’s lead.

Optionality

The excitement regarding the potential uses of cannabis for medical and medicinal reasons continues to grow.  Anecdotally many people report using some form of cannabis to aid sleep.  The market for sleep aids is estimated to reach $79 billion by 2022 and is likely underestimated as it focuses on prescription drugs and devices. 

Anti-anxiety benefits are also reported by many people and represents another significant market.  Research into the benefits for Alzheimer’s contuse as this is written.  Optionality is about what may be.  As research continues so will the potential uses for which cannabis may be used. 

Clearly the sector was trading on hype leading up to legalization in Canada.  The path of inevitability for wider adoption implies a future that is even bigger.  Optionality is just icing on the brownie.

Written by Jason Bagg

Mr Bagg has over 20 years experience in financial services ranging from Capital Markets to Private Equity. Mr Bagg has helped clients build wealth, reduce taxes and plan for retirement. Drawing on his experience, Mr Bagg has spoken on different panels regarding investing and has written numerous due diligence reports and white papers in this area.

Photo by Austin Distel on Unsplash

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Is It Time To Buy Cannabis Stocks?