Pot stock investors may feel a little lost lately.
At the beginning of this year, the sector enjoyed an enormous amount of investor attention, with some tickers becoming meme stocks on social media. Many stocks were enjoying parabolic rallies.
But starting in mid-February, the tickers that went up a lot began coming back to Earth. And it wasn’t just the cannabis sector. Tech companies that had soaring share prices earlier also experienced pullbacks of considerable magnitude.
Some say it was the market reacting to higher expected inflation, and hence higher interest rates. Some say the stocks’ fundamentals didn’t support their high valuations. Yet others say this was simply profit-taking after a massive bull run.
It doesn’t help that the media always tries to sensationalize things. When stocks are rallying, the headlines make you want to invest immediately due to the fear of missing out (FOMO). And when stocks are pulling back—like what’s been happening recently—the headlines are meant to keep you up at night.
In reality, stocks move for a million different reasons. But there’s one lesson investors should definitely learn from the recent moves—a lesson the market has taught us over and over again: chasing parabolic runs can be very risky.
That said, since pot stocks have experienced a fair bit of shakeout lately—and some are actually entering a narrowing consolidation phase—it could represent a new entry point for investors who were previously on the sidelines.
No, I don’t mean pot stocks will bounce back up immediately. However, if you look at how much money Americans have been spending on legal pot lately, you’ll see that the growth story in the U.S. cannabis industry could be just getting started.
The Size of the U.S. Pot Market
2020 was a difficult year for many industries due to the COVID-19 pandemic. While pot companies were largely deemed essential businesses, the pandemic certainly presented some logistical challenges. But as we know now, the marijuana industry is very resilient.
According to cannabis market research firm BDSA, legal pot sales in the U.S. totaled $17.5 billion in 2020, marking a 46% increase over the $12.1 billion reported for 2019. (Source: “BDSA Reports Global Cannabis Sales Exceeded $21 Billion in 2020; Forecasts $55.9 Billion by 2026,” GlobeNewswire, March 2, 2021.)
Obviously, new markets were a major source of growth. Just take a look at Illinois, which started allowing recreational marijuana sales on January 1, 2020. The state saw a whopping $784.0 million increase in legal cannabis sales last year. Notably, this increase helped Illinois surpass the $1.0-billion mark in total legal marijuana sales in 2020.
But even consumers in established U.S. cannabis markets were purchasing more pot from legal dispensaries than ever before. In California, the largest pot market in the U.S., legal sales grew by $586.0 million to $3.5 billion. In Colorado—the first U.S. state to legalize medical marijuana (1996) and one of the two first states to legalize recreational marijuana (2012)—sales rose by $451.0 million to $2.2 billion in 2020.
And more states are joining the party. During the 2020 election, Arizona, Mississippi, Montana, New Jersey, and South Dakota voted to legalize medical and/or recreational cannabis.
More recently, New York lawmakers passed a bill to legalize recreational marijuana, making the Empire State the 15th U.S. state, along with the District of Columbia, to legalize recreational pot.
Even though federal legalization is yet to happen, the launch of new markets—combined with the continued growth of existing markets—should allow the industry to continue traveling on an upward path.
BDSA forecasts that, after reaching $17.5 billion in 2020, legal cannabis sales in the U.S. will reach $41.3 billion in 2026, translating to a compound annual growth rate (CAGR) of 15%.
However, even that number may not represent the true potential of the cannabis industry.
Why the Best Could Be Yet to Come for Pot Stocks
The illicit marijuana market is estimated to be doing more than $100.0 billion in sales every year. And even in regions where pot is fully legal for recreational use, not every cannabis consumer has been purchasing pot from legal dispensaries.
Just take a look at Canada. Our neighbor to the North legalized recreational pot nationwide in October 2018, but it wasn’t until the second quarter of 2020 that legal pot sales surpassed illegal ones for the first time.
In other words, nearly two years after full legalization in the country, the illicit market still accounted for a substantial part of Canadians’ pot spending. (Source: “StatsCan: Legal Pot Spending Beat Black Market for First Time in Q2,” BNN Bloomberg, August 28, 2020.)
The move of consumers from the illicit market to the legal market is one of the reasons Canada’s pot industry continued to grow rapidly. In 2020, legal retail pot sales in Canada totaled $2.6 billion, marking a 120% increase from 2019. (Source: “Retail Trade Sales by Province and Territory (x 1,000),” Statistics Canada, last accessed April 26, 2021.)
Canada’s example suggests that, even after full legalization, growth momentum can continue to be very strong for the cannabis industry.
In the U.S., pot legalization has made solid progress at the state level, but it could take years for consumers in states with legal marijuana to move from the illicit market to legal dispensaries. Add in the potential of new markets that are yet to launch and you can see that the U.S. cannabis industry is really a long-term play.
Of course, different analysts have different expectations. The more bullish ones project that the U.S. marijuana industry will hit $100.0 billion by 2030. (Source: “The Legal Cannabis Industry Could Skyrocket to $100 Billion in the US Alone in a Decade,” Business Insider, December 4, 2020.)
Today, several big U.S. pot companies are each capable of making well over $100.0 million in quarterly sales. But compared to how big the market could become, it’s obvious that pot remains a nascent industry.
That doesn’t mean every American pot stock will shoot through the roof. Like any industry, the competitive landscape in the U.S. cannabis market continues to evolve, and not every pot company will be a winner in the long term.
But at a time when pot stocks are not market favorites, the numbers we just looked at should remind investors that ignoring the industry could be a mistake.