The two forces building for cannabis stocks and why you need to invest now
Cannabis stocks are at a multi-year low with the Alternative Harvest ETF down 67% from its 2018 high but that could all change within a few months. Two factors are lining up that could take marijuana stocks to new highs and bring investors back into the shares.
In this video, I’ll show you what those factors are, when to invest and reveal three cannabis stocks I’m buying now.
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Why Cannabis Stocks Could Move Higher
Nation, since the first companies in medical marijuana listed on the exchanges years ago, it’s been a wild rid for investors. An $80 billion market in the U.S. alone, investors have rushed in on any news or hope for legalization.
And if you look at a chart of GW Pharmaceuticals, a cannabis therapeutics company, the share price shows this cycle of hype and then the crushing letdown.
That first major wave of legislation in 2014 put legalization on the ballot in 15 states and took the share rocketing up 153% through mid-2015…only to crash back to earth the next year. The next wave of legislation had a longer-lasting effect on the share price but even that has worn off and the market has again lost interest.
But two factors have lined up that could take cannabis-related stocks back to their peaks, bring that hype back and make investors a LOT of money.
Now could be the time to get back into the theme, before the rest of the market and I’m buying the three stocks we’ll talk about today.
Why You Should Invest in Marijuana Stocks NOW!
The first factor here is the higher likelihood that Democrats take the Presidency and have complete control of Congress next year, a change that would give them a free hand at passing legislation.
Now, this isn’t a political video. Those of you in the Nation know I’ve never made this channel about politics. Here I’m just sharing recent polling and want to help you get ahead of what could be a huge change this year.
The overall consensus for marijuana legalization has completely flipped over the last 50 years with 67% of Americans in favor. That support is even higher among Democrats. In a study by the Harvard Institute of Politics, Democrats favored legalization by an almost two-to-one margin while the majority of Republicans opposed a change to the law.
Democratic-candidate Joe Biden has an average lead of 8% in polls according to RealClearPolitics and the consensus now puts the odds of winning the White House above 65% in November.
Perhaps more significant is that the consensus now has the Democrats retaking the Senate in November which would give them control of Congress as well.
The U.S. House of Representatives passed the SAFE Act last September to clarify federal rules on banking for cannabis companies. A lot of the retailers and even larger companies have been squeezed for funding because traditional banks won’t lend so the legislation is seen as a big step but it was dead-on-arrival in the Senate. With a Democratic control of both chambers next year, this legislation is likely to come back and bring a lot of funding to marijuana companies.
Even if that doesn’t happen though, if President Trump holds the White House or if Republicans keep majority of the Senate, this next factor could override everything.
The lockdown this year means states are dangerously underfunded from a loss of sales and other taxes along with higher costs related to containing the pandemic. The Center on Budget and Policy Priorities estimates state funding shortfalls of 10% in fiscal 2020, which ends in June for most states, and 25% for the 2021 budget year. That could add up to a budget hole of $550 billion over the three-year period, with the 2021 budget gap the largest in decades.
Every state will be hit with Arizona expecting a revenue loss of $1.4 billion. California is estimating a $32 billion shortfall, equal to 37% of its general budget and more than three-times the amount in its rainy day fund.
Since states aren’t allowed deficit spending, they have to balance their budgets, this shortfall means tens of billions in public services will be cut…unless they can somehow make up that money.
I’m looking at you legalized marijuana.
Of the 10 states with legalized cannabis in 2018, taxes on sales were as high as 37% above normal sales tax and some three states saw increased revenue over $200 million. Last year, Colorado passed a billion dollars in state revenue from legalization.
States are going to be looking for ways to plug that budget gap and it could lead to another wave of legalization.
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Why I'm Not Investing in the Marijuana Stocks ETF
So let’s look at the biggest players in cannabis stocks, three stocks I’m buying ahead of this theme but first I want to highlight The ETFMG Alternative Harvest ETF, it’s ticker MJ…obviously. The marijuana fund started trading in 2015 but has seen the same weakness as the rest of the market and is down over 60% in the last year.
While I usually love ETFs for that instant diversification and ease of investing, I don’t feel like this one is your best bet on the theme. The fund charges a 0.75% expense ratio, which is extremely high for an ETF. Also though, since the industry is pretty small, the fund only holds 37 stocks so it’s not like you can’t just replicate it on your own with 10 or 15 of the marijuana stocks.
Now with what could be a rush of investor sentiment into marijuana stocks, the fund will probably do well. Shares give you that instant diversification across the theme but I still feel like your best bet is to look for the best of breed among the group.
Cannabis Stocks to Buy Now
First on our list is $2.3 billion Cronos Group, ticker CRON, one of the largest marijuana companies.
Cronos sells medical and recreational cannabis with most of its revenue from Canada but also with exports to Poland and Germany. The company looks like it has the jump on the industry in terms of an international strategy with joint-ventures in Europe, Latin America and Australia. It’s setting up local cultivation and distribution in these regions and will soon have a fairly strong global presence.
Another advantage of Cronos over peers is that it’s got a huge cash reserve, so that survivability we’ve been talking about on the channel these last few months. Thanks to a $1.8 billion investment from Altria Group, the company has more than $1.3 billion in balance sheet cash and no debt. That could be a huge advantage for growth and acquisitions as the rest of its competitors struggle to conserve cash.
That investment by Altria gave it 45% of the company with an option to pick up another 10% stake in the future. These big stakes always catch my attention because anything close to that 50% ownership is almost always a bid to make for an easy acquisition down the road.
Analysts price targets range from $4.81 on the low side to as high as $10 per share and I think the shares could go even higher if that investor hype returns.
Next here is another of the largest cannabis stocks, $4.2 billion GW Pharmaceuticals, ticker GWPH.
GW Pharma is focused on the medicinal side of the market with cannabinoid treatments for epilepsy and MS. The company had a strong launch of its Epidiolex treatment for childhood seizures last year with an estimated $296 million in sales. Net sales jumped 200% to $120 million in the first quarter of this year versus the same period in 2019.
The company’s seizure treatment was approved in the EU late last year and should continue to add to revenue. It’s also seeing encouraging results for the Sativex product to treat multiple sclerosis and could get approval this year.
Like most marijuana stocks, earnings are still pretty horrible to look at but are expected to turn positive next year. That could help prove the investment and bring investors rushing back in.
Analyst price targets range from $140 a share to as high as $275 per share over the next year, double where the stock trades now.
The largest cannabis stock by market size, $6.4 billion Canopy Growth, ticker CGC is one of my favorite plays on the potential for federal legalization.
Canopy closed a deal last year to buy U.S. Acreage contingent upon federal legalization and this kind of foresight could be about to pay off. Acreage holdings has licenses in 20 states including 87 dispensaries and 22 cultivation sites which would give Canopy a huge U.S. footprint.
Right now, the company books more than 80% of its sales in Canada with the rest coming from production licenses in about a dozen other countries. The U.S. growth though would add significantly to the top-line and eventually flow through to earnings.
Like Cronos, Canopy has a pristine balance sheet with over $2 billion CAD in cash reserves against just $450 million in long-term debt. A lot of this is from an investment from $37 billion liquor giant Constellation Brands which owns 37% of the company.
Analyst targets range from just above $13 a share on the low side to $23 per share over the next year.
Now could be the perfect time to start investing in cannabis stocks and get in before the next big wave of investor buying. Marijuana stocks are likely to benefit from two big forces that could put legalization back on the timeline very soon.