The old German saying that “trees don’t grow to the sky” suggests that there are limits to growth, and experienced investors know that this undoubtedly applies to growth in companies and stocks. But what applies to trees might not apply to plants – especially if the plant happens to be a cannabis plant.
For younger readers, you might not remember a time when “Just Say No” was all over the media and the idea of cannabis decriminalization was inconceivable in the U.S. And now, 80 years of anti-marijuana laws are coming to an end: a chapter of American history is closing with the passage of the Farm Bill and a majority of states permitting cannabis in one form or another.
It’s big business now, and mega-corporations want in. Alcohol and tobacco companies, seeking to buoy their flagging markets, have been forming strategic partnerships left and right with comparatively smaller cannabis companies. They’re desperate to get a head start in an American industry which, according to Cowen’s Vivien Azer, could grow to $80 billion by 2030.
Because marijuana legalization has strong public support, big companies are unafraid to take positions in cannabis companies. For instance, Goldman Sachs acted as financial advisor and Bank of America Merrill Lynch provided committed financing when Corona beer maker Constellation made a $4 billion bet on Canadian licensed producer Canopy Growth Corp.
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Cigarette companies are also realizing that they’re going to have to keep up with consumer preferences for cannabis products. When Altria Group, the manufacturer of Marlboro cigarettes, agreed to buy a 45% stake in cannabis company Cronos Group for $1.8 billion in December, some reporters were surprised but it’s just part of an inevitable shift in the market.
What these industry giants understand is that millennials are now the largest demographic group in the United States, having surpassed baby boomers in numbers just recently. As the millennials move up in their positions in the workforce over the coming years, their purchasing power will increase exponentially.
This has huge implications for cannabis stock holders because millennials will be big-time consumers of CBD and other cannabis products. With 74% of millennials supporting marijuana legalization, and cannabis stocks being so popular among millennials that Robinhood is literally having trouble executing the massive volume of pot stock trades, there’s no stopping the American marijuana index from pushing upwards:
Don’t get the wrong impression: there have been, and will continue to be, bumps in the road and periods of price consolidation in the marijuana market. 2017 was a challenging year, for instance, but investors only needed to “be right and sit tight” and they would be profitable right now if they had just held on patiently.
It’s also important to mention that not all cannabis companies are equally profitable: some are better than others, and doing your due diligence is a critical piece of the investing puzzle. Personally, I like to keep both big cannabis companies and smaller up-and-comers on my watch list, as the start-ups often have the greatest potential for outsized gains.
So there will be dips, yes, but over time it’s hard to imagine cannabis stocks as a whole going anywhere but up. It’s perhaps the one exception to the age-old rule: if I’m correct, these trees might indeed grow to the sky.
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