Cannabis stocks have been absolutely smoked over the past year (Sorry – pun intended). A main reason behind the collapse is that growth stocks in general – stocks heavily reliant on an abundance of future earnings – have been broadly sold off since last fall. Such growth stocks include tech, payments, crypto and “meme” stocks, among others. After a very long and very successful stretch of eye-popping gains, the bottom fell out as interest rates began to rise (with more interest on the near-term horizon, a pig in a poke becomes much less appealing). The other reason for the collapse in cannabis stocks is political. After receiving a huge bid after the 2020 elections where democrats won power in Washington; most investors, especially those bullish on cannabis stocks, would have expected more legislative progress in 2021. Even if not full federal legalization, at least some work on the safe banking front was fully baked in (sorry – one last pun, I promise). I wrote about weed stocks back in 2017 about the hopes of finding the first “Green Chip” and thought this would be a good time to at least revisit the sector.
By early 2017, the number of states legalizing began to swell and crossed the halfway point in terms of number of US states laying the potential for an exciting new frontier for investing. The 2017 article was setting the stage that investor interest should continue to grow, but the public companies involved at the time in the industry were unproven, unprofitable, and capital starved speculative opportunities. The industry was set to inevitably grow but making money as a stock investor was likely to be far from anything easy.
Fast forward a few years and we’ve seen a couple of boom-and-bust phases – with a lot of the early stocks folding or being picked up for pennies on the dollar. One of the first exchange traded funds to invest in the sector soared nearly 100% over the next 18 months as investor interest reached a crescendo in late 2018. The ensuing bear to the public companies at the time was brutal and eventually was trading at 80% losses at covid crash bottoms. Since then, we’ve seen an enormous boom, with several hundred percent gains, followed by yet another brutal near 80% collapse.
That’s not all that’s changed, however. The industry has grown up and recently seen a host of companies move from negative to positive cash flow. This can be a pivotal time as companies reach scale and can begin to self-fund some growth opportunities while achieving the scale necessary to become further profitable. Not every company in the Cannabis sector is going to fit this bill, but if you are willing to do your work, you’ll find some very well managed companies that have positioned themselves to do quite well as legal cannabis use continues to grow rapidly. Further, US multi state operators (see MSOS as an ETF with many such companies), carry a potential call option (a stake in a step function higher) for when legislation at the federal and state levels continues to progress. (Disclaimer: FEG has long positions in the shares of ETFS for MSOS and MJUS).
Consider this simply a public service announcement, but not a specific recommendation for a stock or fund because I may not know you or your overall portfolio and objectives. The 2017 PSA was all about reinforcement that the industry warranted increasing levels of investor interest, but caution and prudence was warranted for the then current shares in public companies. Today…. well…. I’m always cautious and advise prudence. But today, I see a sector full of companies that are no longer the speculative lottery tickets as described stocks just a few years ago. It doesn’t look pretty out there on the heels of such losses, but this is to be expected for an infant industry going through the boom-and-bust part of their life cycle. With no clue as to whether we are near the end of this bear market for the sector, many of these recently profitable companies merit roles with the right dosage in the right portfolios.
