Three Reasons To Be Bullish On Cannabis Stocks

Since mid-March, Cannabis stocks have rebounded 79% from the record low set by the New Cannabis Ventures Global Cannabis Stock Index, yet they remain down 28% in 2020 and 83% since early 2018, days after California legalized cannabis for adult-use…

As the coronavirus breakout was just beginning to be seen as a major threat to our health and to the economy back in March, it wasn’t clear what the implications might be for the cannabis industry, which was already struggling with a capital crunch that had intensified during the vaping crisis in late 2019. In early April, I shared some steps for readers to upgrade their exposure within the sector. I concluded that “investors should choose their cannabis stocks very carefully in this environment, trying to find those companies that will survive now and thrive with diminished competition in the future.”

By mid-May, it became clear to me that the future would indeed allow many leading cannabis companies to prosper, and I upgraded my view of the cannabis sector, sharing my bullish outlook initially with my subscribers at 420 Investor and then, as well, with readers of my weekly newsletter at New Cannabis Ventures, where I described the “Third Wave for Cannabis Stocks” that began, in my view, in mid-March. For those looking for a more detailed discussion of the past two waves, I shared the history in an article at Seeking Alpha.

Today, now almost four months into the new bull market, at least in my view, I am even more optimistic about the future for the sector, though I continue to caution that the rising tide won’t lift all boats. Two of the leading multi-state operators (MSOs) that I have discussed here at Forbes in the past, Green Thumb Industries and Trulieve Cannabis, hit 52-week highs on July 10th. Both were among the 7 cannabis stocks that had gained year-to-date as of early June.

My bullishness isn’t based on technical indicators. Instead, I see a fundamental case for the cannabis industry to perform well at a time when many industries will struggle. While I am not addressing valuations, I will say that they look more reasonable than ever. Very simply, the leading MSOs have substantially ramped up revenue and improved profitability over the past 18-24 months, yet their prices haven’t budged.

Demand Is Booming

The pandemic has boosted demand for cannabis in the legal market, something that is quite clear in recent data. In March, consumers stocked up on cannabis in all geographies, similar to what we saw in other products, and, in some markets, April levels regressed a bit. Looking past the short-term, though, indicates very strong growth. In May, BDSA data indicated surging demand across five mature Western state markets. In particular, Oregon grew a stunning 87% compared to a year ago. Its legal cannabis sales in the first five months of the year are up 51% compared to a year ago.

I have been studying the Florida medical cannabis market closely, and it has been surging as well. The state provides weekly data that details the number of patients as well as the unit volume sales of medical cannabis products and flower. The patient growth slowed a bit during the pandemic but it has accelerated sharply in recent weeks, growing 51% compared to a year ago:

What is even more impressive is that the product demand has increased even more, with THC products growing 66% over the past year and flower quadrupling.

The reasons for the increased demand across almost all markets is due to several factors. First, the pandemic itself is playing a role by giving many more time to consume cannabis but also by increasing levels of anxiety and sleep issues, which is likely driving new consumers into the market. This benefits in particular the legal cannabis market, in my view, as these new consumers are less likely to pursue the illicit market.

A more important factor, though, may be technology. Many states have allowed on a temporary basis for curbside pick up or delivery, which wasn’t allowed in many markets previously, and these measures are likely to be made permanent. New modes of delivery has enabled companies to implement online ordering, a massive advantage over the illicit market, as consumers are able to order cannabis just like they buy other types of products online. This has been enabled by several new payment processing options that allow electronic payment rather than cash, another big win for the legal market.

In addition to more convenience, many believe that…

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