Everybody’s down on cannabis companies these days. Marijuana stocks have taken a big hit across the board.
Part of the problem is that there’s too much cannabis being grown in places like Canada and Oregon. As a result, prices are taking a hit. A lot of companies in those places may not survive the winter. But the ones that do emerge victorious will have a great shot at dominating their piece of the market for decades to come.
Another point I want to make is that there isn’t an oversupply everywhere. Sure, Canada has a bit of a countrywide problem. And Oregon has more than 1,000 licensed growers. Understandably, wholesale prices have plunged from around $2,000 a pound to $600.
But here in the U.S., each state has completely unique laws. First of all, you can’t ship cannabis across state lines. That would violate federal laws and land you in a heap of trouble (even if it’s legal in the states you’re shipping to and from).
This means that in the U.S., you can’t fix supply problems by importing or exporting the plant from state to state. Each state has to grow it all within its own borders – according to the specific laws of that state.
Maryland, for example, started with only 15 growers in its medical marijuana market. Three years later, it has just 22 growers. That’s still a very small number of licensed growers. And these growers are doing very well. Here’s an excerpt from a recent Washington Post report:
Cultivators across the state are dramatically adding capacity – to meet the needs of patients flooding the market and to potentially service recreational users in the future.
And the number of states legalizing cannabis continues to grow quickly.
Illinois has legalized recreational marijuana. Sales of recreational weed will begin January 1. And the state is going to be a monster market.
And New Jersey legislators are making a huge push to legalize recreational cannabis. Local news site NJ.com says the odds of it happening are 50-50. It’s another huge market that will inevitably go fully legal.
A total of 11 states, plus Washington, D.C., have now legalized recreational marijuana use. A bunch more are in the pipeline. And there are only 17 states left that haven’t legalized medical cannabis at some level.
Cannabis will continue its march to full legalization. Medical uses will continue expanding dramatically as we finally study this extremely valuable plant.
And guess what? Cannabis stocks will continue to be volatile. One big reason is because marijuana is an industry dominated by retail investors (us), not big institutional investors. Here’s how I described the situation in February.
Institutional investors also tend to buy and hold, which helps stabilize the price of assets. Retail investors trade in and out much more frequently and tend to panic-sell. Both increase volatility.
Combined with the market’s high growth rate, this should make for some thrilling/terrifying price action over the coming years. For me, high volatility means try to buy low and hold.
Despite these inconveniences, I wouldn’t want it any other way. The marijuana market today is a rare beast. It’s a huge, fast-growing, disruptive force. And retail investors are driving the market, while most professional money is on the sidelines indefinitely.
There’s never been a market like this before. It’s going to be a wild ride for the next few years, but those who buy and hold high-quality companies should do incredibly well.
Right now is one of those “buy low” opportunities. It’s not often that you get a chance to buy high-quality stocks at this much of a discount.
We’ll be releasing a new portfolio of cannabis stocks to First Stage Investor members in the next week or so. And we think the timing couldn’t be much better.