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Cannabis Stocks: High Growth at Low Prices

Cannabis Stocks: High Growth at Low Prices
By Adam Sharp
Date January 22, 2021

Cannabis stocks had a rough 2018, 2019, and most of 2020. However, it looks like the bear market may finally be ending now.

In the last two months, cannabis stocks have surged higher. The largest cannabis exchange-traded fund (ETF) by assets — the ETFMG Alternative Harvest ETF (MJ) — rose from around $11.50 at the beginning of November 2020 to around $19.40 today. However, the MJ ETF is still way off its all time highs of September 2018, when it briefly traded at more than $40 per share.

I think this new cannabis bull market still has serious potential to run. The primary reason is simple — growth remains stellar.

Incredible Growth Numbers

The cannabis industry continues to put up big growth numbers. The largest player in Canada — Canopy Growth Corporation — grew revenue 77% year-over-year in its latest quarter. That’s impressive for such a large and mature company.

Here in the U.S., legal cannabis sales are estimated to have increased 40% from 2019 to 2020. And top cannabis firms are putting up huge year-over-year (YoY) numbers. Multi-state operator (MSO) and distributor Cresco Labs saw revenue increase 326% YoY to $153 million in its most recent earnings report. Curaleaf, another vertically-integrated MSO, saw revenue jump 197% YoY to $182 million in its latest quarterly earnings release. And major U.S. player Trulieve saw sales rise 92% YoY to $132 million. That’s an impressive set of gains from three significant firms.

The once-humble legal marijuana industry is turning into a multi-billion dollar giant. And strong growth is projected for years to come.

Growth + Value

Everyone in the world seems to be laser-focused on technology stocks these days. And sure, there’s some nice growth to be found there. It’s not uncommon to see large tech stocks still growing at 20%-to-30% per year. And a few hot public tech companies are even growing 70% or more a year.

But when you buy fast-growing tech today, you are also paying a very high price for that growth. For example, Snowflake is one of the hottest tech stocks right now. It’s growing revenue at a 118% YoY rate. But today it’s valued at 165 times sales! That’s an incredibly high valuation.

Cannabis, meanwhile, is rivaling or surpassing tech growth numbers. And it’s far cheaper on a price/sales basis. For example, the average holding from the Cambria Cannabis ETF trades at just 2.25 times sales.

I believe that select cannabis stocks remain attractive at these levels. It’s one of the only areas in public markets where I see opportunities to buy high growth at reasonable valuations. Almost every other high growth sector is far too expensive for my tastes.

Of course, cannabis stocks are not for the faint of heart. This is a largely retail investor-driven market, which means it can be highly volatile. Institutional investors are still mostly locked out of the market because cannabis is still illegal at the Federal level. However, I believe eventually we will see Federal legalization. When that happens, big investors won’t be able to ignore this growth market any longer. And they will scramble to get exposure. This may be one of the few opportunities in the public market where everyday investors can get in before institutional investors.

Cannabis still provides a rare chance to invest early in a high-growth sector. After all, some states haven’t even legalized cannabis yet! The industry is still young — with plenty of room to grow.

P.S. A recent study published in the medical journal Pain Medicine showed that cannabis-based medicine can reduce opioid usage and improve quality of life in those with chronic pain issues. Opioid use in the study group decreased from 28% of participants to 11% after just 6 months. This is an amazing result, and the medical angle is a big reason I believe so strongly in the future of cannabis.

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