Why Pot 2.0 Could Return Big Gains
2020 could be great for pot stocks. This year is looking bullish, as the segment has been easily outperforming the Nasdaq and S&P 500. In my view, a return to the risk on trade could provide a massive boost to marijuana stocks.
In 2018, cannabis stocks skyrocketed based on the euphoria of cannabis legalization in Canada. We saw sky-high estimates, hinting at triple-digit growth and a belief that pot consumers would line up endlessly for legal marijuana.
But that wasn’t the case in the early days of legalization in Canada. Distribution problems and retail prices that were higher than the black market helped deliver softer sales figures than predicted.
Then, in 2019, marijuana companies (especially smaller ones) faced concerns regarding financing.
In 2020, however, my view is that things are looking better as distribution networks increase in Canada and the United States.
Pot companies have been adjusting their operations and should be better prepared for the years to come.
So, while “Pot 2.0” (the legalization of marijuana-derivative products in Canada) is expected to generate higher sales, further expansion of legal marijuana in the U.S. will be key factor for the industry.
So far, 11 states (and D.C.) have legalized recreational marijuana and I expect that number to rise. Illinois was the latest state to jump on board. And yes, there were big line-ups there.
The introduction of the Marijuana Opportunity, Reinvestment and Expungement Act in the House of Representatives in 2019 was encouraging, despite the reality that the legislation will likely not be approved by the Senate and the president.
Nonetheless, it’s a step in the right direction that could pick up steam in the next few years.
A report by Grand View Research, Inc says the U.S. market for legal cannabis is expected to grow at a compound annual growth rate (CAGR) of 24% from 2019 to 2025. The global legal cannabis market could be as high as $66.3 billion by the end of 2025. (Source: “Legal Marijuana Market Worth $66.3 Billion By 2025 | CAGR: 23.9%,” Grand View Research, Inc., last accessed January 16, 2020.)
A look at the chart of the widely followed Horizons Marijuana Life Sciences Index ETF (OTCMKTS:HMLSF, TSE:HMMJ) shows a nice bounce of about 12% year-to-date.
Chart courtesy of StockCharts.com
The Horizons Marijuana Life Sciences Index ETF has broken above its trendline resistance and the 50-day moving average on strong relative strength and a bullish moving average convergence divergence (MACD).
A breakout could drive the ETF to the resistance level of $11.00 and the 200-day moving average around $14.00.
There are many pot stocks trading at low prices that deserve a look. A key factor to consider is the strength of the company’s balance sheet.
Well-funded marijuana companies will have an advantage, since they can continue to expand without the need to look for financing. They also have the option to acquire smaller marijuana operations on the cheap.
Why Cash is King for Marijuana Stocks
Canopy Growth Corporation (NYSE:CGC) is an ideal marijuana stock in my view. The vertically integrated grower and seller of cannabis and hemp products in Canada has an extremely sound balance sheet.
While Canada is the company’s focus market at this time, Canopy Growth operates in 12 countries, including the United States.
If the U.S. federally legalizes marijuana within about seven years, Canopy Growth will acquire Acreage Holdings, Inc. (OTCMKTS:ACRGF, CNSX:ACRG.U), which operates dispensaries and cultivation/processing sites in about 20 states. (Source: “Canopy Growth Announces Plan to Acquire Leading U.S. Multi-State Cannabis Operator, Acreage Holdings,” Canopy Growth Corporation, April 18, 2019.
Armed with about CA$4.5 billion in cash and short-term investments (and CA$842.0 million in long-term debt), Canopy Growth has the latitude to do well as the demand for legal marijuana grows. (Source: “Canopy Growth Corp.” MarketWatch, last accessed January 20, 2020.)
The CGC stock chart shows the breakout on strong relative strength and bullish MACD.
Chart courtesy of StockCharts.com
The selling of cannabis stocks in 2019 was excessive, and an opportunity to pick up pot stocks at much lower prices.
Instead of focusing on the past, however, I advise looking to the future. The outlook for marijuana stocks remains bullish.