The U.S. House of Representatives, on April 1, voted to federally decriminalize marijuana, and ETFMG Alternative Harvest ETF (ticker: MJ), considered a proxy for the industry, didn’t do much at all. Were marijuana investors just high at the time? Unlikely. For one, the fund had gained ground ahead of the vote. And two, investors have seen this movie before.
The chamber also passed a legalization measure in 2020, only to see it fizzle in the then-Republican-controlled Senate, which declined to take it up for a vote. Although Democrats now control the upper chamber, cannabis industry analysts and others don’t think the measure has much chance of becoming law.
But that doesn’t mean now isn’t a good time to invest in marijuana stocks. Here are some indicators that it might be time to invest in this burgeoning industry, plus tips on how to invest in marijuana now:
— Now is a good time for bargain hunting.
— The marijuana industry has room to grow.
— Individual marijuana stocks to buy now.
— Marijuana ETFs offer a one-stop shop.
— Cannabis market is growing without federal reform.
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Now Is a Good Time for Bargain Hunting
Cannabis stocks have majorly underperformed the broader stock market since early 2021, as the exuberance from that time has gone up in smoke. The New Cannabis Ventures Global Cannabis Stock Index is now below 30, after breaching 90 in February 2021.
According to Jeff Rassas, chief strategy officer with dispensary franchisor Item 9 Labs Corp. (INLB), top-tier operators are trading at roughly 40% of their 52-week highs. Multiples comparing enterprise value with certain earnings metrics for multistate operators are “far below any growth industry average today,” says Michael Sassano, CEO of Somai Pharmaceuticals.
“Cannabis stocks overall have been trending down for the last year, and market caps are low,” says Jay Czarkowski, founding partner with Canna Advisors. “There is a tremendous upside for investors who get into cannabis now.”
Marijuana Industry Has Room to Grow
“There is little excitement around the sector,” says Kevin Bush, chief financial officer with Sweet Leaf Madison Capital. “Nonetheless, it is important for investors to keep in mind that all the reasons the sector has been so popular in the past, specifically the unambiguously high growth trajectory of the industry, still exist.”
Globally, cannabis sales rose from around $21 billion in 2020 to $29 billion in 2021 and are expected to breach $35 billion this year, says Jason Wilson, cannabis research and banking expert at ETF Managers Group. Corporate fundamentals are also improving, Wilson says.
Wilson sees several factors that support continued growth in cannabis domestically and globally. The cannabis market has expanded as more states and countries move to legalize the drug. Even as legal markets proliferate, consumers in existing markets have been increasing in number as “canna-curious” customers begin consuming cannabis and related products. And existing customers in established markets are buying more cannabis as the number of dispensaries have grown and customer experiences have improved.
“Cannabis investing in 2022 should be understood as an investment into a high-growth industry with a relatively long time horizon,” says Micah Tapman, CEO at BDSA.
Individual Marijuana Stocks to Buy Now
Individual stocks offer promising options. Several multistate operators — Trulieve Cannabis Corp. (TCNNF), Green Thumb Industries Inc. (GTBIF), Curaleaf Holdings Inc. (CURLF) and Cresco Labs Inc. (CRLBF) — have been growing in the face of difficult operating conditions and are rated as strong buys on TipRanks, TipRanks CEO Uri Gruenbaum says.
Sassano also likes Trulieve and Cresco, saying they are must-have cannabis stocks. “They have shown strong management and a goal of profitability,” he says.
He also likes tier-two players Jushi Holdings Inc. (JUSHF) and Ayr Wellness Inc. (AYRWF), which he says have good regional positions. Meanwhile, TILT Holdings Inc. (TLLTF) and Planet 13 Holdings Inc. (PLNHF) have strong single and secondary state presences with room to grow, he says.
“Curaleaf has developed its footprint focusing on states with large populations and limited licenses, such as Massachusetts, New York, New Jersey and Florida,” says Bush.
Bush also likes AFC Gamma Inc. (AFCG), which “has taken a similar approach by lending to the industry in limited-licenses states,” he says.
Rassas points to Northern Lights Acquisition Corp. (NLIT) for cannabis banking.
Marijuana ETFs Offer a One-Stop Shop
Picking individual stocks can be tricky, especially in the cannabis industry. According to Sassano, some companies in the relatively young space still suffer from bad management. And that’s on top of difficulty with profitability because of onerous regulations, high taxes and a lack of institutional investors to keep retail-investor-related volatility in check, he says.
“The fundamental risk of investing in cannabis right now is that it is difficult to pick winners,” says Charlie Alovisetti, a cannabis lawyer with Vicente Sederberg. “Could you have picked the winner of browser wars in the ’90s? When was the last time you used Netscape?”
Exchange-traded funds, or ETFs, on the other hand, offer a one-stop shop for diversification. According to Wilson, they also offer transparency, liquidity and cost savings. His company offers MJ, which provides exposure to the global cannabis industry, and the ETFMG US Alternative Harvest ETF (MJUS), which invests in U.S.-focused companies.
Investors can also consider: AdvisorShares Pure U.S. Cannabis ETF (MSOS), Global X Cannabis ETF (POTX), AdvisorShares Pure Cannabis ETF (YOLO), Amplify Seymour Cannabis ETF (CNBS), Cambria Cannabis ETF (TOKE) and The Cannabis ETF (THCX).
Cannabis Market Is Growing Without Federal Reform
Federal cannabis legalization, which would provide catalysts that would unlock value for investors, hinges on the Senate, which seems unlikely to pass the bill the House voted on in early April.
“While many individual states have legalized cannabis use in some form, the addition of federal legislation on cannabis could certainly provide an upside catalyst for cannabis stocks and ETFs, which have been struggling to find their footing over the last 12 months,” says David Keller, chief market strategist at Stockcharts.com.
As long as marijuana remains a Schedule 1 drug, policy-related volatility may continue. But it’s important to remember that the industry as a whole has already taken great strides even while operating under federal prohibition.
“What is interesting for investors, though, is that price targets for U.S. stocks do not yet price in a change in federal legalization and all the benefits that come with it,” Gruenbaum says.
Federal legalization would mean U.S.-based companies that actually grow the plant could uplist to major exchanges, Gruenbaum says.
That, combined with less restrictions on banking, would unlock more institutional investment, which could help decrease volatility that is largely driven by the whims of retail investors.
In addition to being able to list on U.S. stock exchanges, domestic publicly traded “plant-touching” companies would no longer face “tremendously high” federal tax rates for state-licensed cannabis companies, says Rachel Gillette, cannabis lawyer with Holland & Hart.
“A lower, more rational federal income tax rate will mean these companies have more capital to reinvest and grow,” Gillette says.
Federal legalization would lower the cost of capital for marijuana companies by opening them up to traditional financing, such as that from venture capital and private equity firms, Tapman says.
“All of the buzz of passing in just the House won’t make a lasting impact,” Czarkowski says. “The lasting impact comes only when it passes the House and Senate and becomes law: Banking laws open up, tax burdens lessen, and interstate commerce and international trade fuel longtail growth.”
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How to Invest in Marijuana originally appeared on usnews.com
