Up until the recent broader market collapse, cannabis stocks were the surprise outperformers in both 2017 and 2018. Seemingly no one could get enough of legal marijuana as sector players continued to enjoy remarkable gains.
For one thing, the fundamentals more than justified the enthusiasm. Earlier this year, Canada become the first G7 nation to fully legalize recreational weed. That opened up the door to tax revenues which previously were impossible to actualize. Subsequently, the Canadian government legitimized the “botanical” industry, providing the necessary fuel for cannabis stocks.
Moreover, public sentiment stateside has shifted dramatically towards legal marijuana. According to the Pew Research Center, the latest read shows that 62% of Americans favor legalization. That contrasts sharply to sentiment in the late 1990s to early 2000s when 62% opposed it.
But the markets ultimately have the last word, and they’re currently not feeling cannabis stocks. Almost all competitors in the field have experienced severe volatility this month. Analysts quickly explained that we’re witnessing a “sell the news” phenomenon.
Just last week, Canada officially made legal marijuana the law of the land. However, analysts considered jumping onboard cannabis stocks as the obvious play. As a result, bears took the opportunity to short the markets. So far, they’re winning, but will this trend last?
Cannabis stocks Still Feasible Despite Pressure
Judging from the coverage of cannabis stocks, the consensus appears negative towards the entire sector. Common arguments include overvaluation, and Canadian marijuana companies suffering from a supply glut due to peaking sales.
It’s important to note that cannabis stocks are incredibly speculative affairs. I consider them as the markets’ version of cryptocurrencies: high risk, high reward. That said, I think the bears are overstating their position.
What we must first acknowledge about legal marijuana is the “conversion factor.” For the first time in perhaps ever, we have seen a black market turn into a bona fide retail market. Something that practically didn’t exist now does.
Beyond that point, legal marijuana likely represents lasting demand. Colorado provides an excellent case study. Since launching their weed industry, every year has produced solid growth. Last year, Colorado generated $1.5 billion in marijuana sales.
States that are suffering from severe budget deficits will want in on the action. So while marijuana remains a Schedule I drug for now, I don’t expect that to be a permanent situation.
After all, money talks, and it’s too good to ignore.