It’s been a crazy few months for cannabis stock investors. From early November to mid-February, the ETFMG Alternative Harvest ETF (NYSE: MJ) surged from around $11 to as high as $34.58. In the weeks since that peak, the cannabis ETF is back down below $22, and cannabis investors are suffering from some major whiplash.
Volatility in the cannabis space will likely continue in the near-term. However, Tom Carroll, editor of the Cannabis Capitalist newsletter, recently said long-term cannabis investors should ignore the noise and focus on these six key long-term trends:
Access to U.S. Financial Markets
Marijuana is still federally illegal in the U.S., which means U.S. multi-stake operators can’t use U.S. banks for financing. As a result, these companies must jump through a series of hoops to get funding from uninsured regional banks, and they must pay exorbitant fees, according to Carroll.
In addition, the classification of marijuana as a Schedule I substance means U.S. cannabis businesses have much higher tax burdens than other businesses. Carroll says he expects regulatory changes will soon ease the tax and financing burden on U.S. cannabis companies, a significant bullish catalyst for investors.
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Access to U.S. Stock Exchanges
A federal ban on marijuana also means U.S. cannabis stocks can’t trade on the Nasdaq or the NYSE. Marijuana stocks are already fighting an uphill battle when it comes to gaining legitimacy in the eyes of many investors, and OTC listings don’t help their cause. In addition, many large institutional investors are prohibited from buying OTC-listed stocks even if the fund managers wanted to. If U.S. regulators lift the ban on MSO stocks in the near future, Carroll said many of the top stocks could see the type of explosion in interest and trading volume that contributed to the run-up in Canadian cannabis stocks in 2018 following their U.S listings.
Emergence Of Cannabis-Adjacent Business
Carroll said businesses like cannabis packaging, labeling and distribution will emerge and generate massive profits the same way sellers of picks and shovels profited during the California gold rush. Key Investment Partners is a new Colorado business that is focused on investing specifically in these types of businesses positioned to benefit from cannabis legalization. Carroll said there will also be booming demand for cannabis payroll services, executive recruitment and operating and accounting software.
Consolidation in the cannabis space has already begun, including deals like the recent merger of Aphria Inc. (NASDAQ: APHA) and Tilray Inc. (NASDAQ: TLRY). However, once buyers no longer have to work about being on the wrong side of U.S. federal law, Carroll said investors should expect deep-pocketed cannabis and consumer-product companies will likely start throwing money at the biggest and best potential buyout targets in the cannabis space.
“These well-run companies will get bought up at premiums, making for a very good investment thesis for cannabis investors,” Carroll said.
Health Care Investments
In addition to recreational cannabis demand, investors should expect a new wave of medical research into cannabis and cannabis compounds. Carroll said anecdotal evidence of the medicinal benefits of cannabis has been building for decades, but the scientific community is just now getting the funding and support to research marijuana. GW Pharmaceuticals PLC- ADR (NASDAQ: GWPH) was the first company to get an FDA approval for its CBD drug Epidiolex in treating seizures, and GW was recently acquired by Jazz Pharmaceuticals PLC (NASDAQ: JAZZ) for $7.2 billion.
A Return To Stock Picking
Carroll said this theme is the most important one for cannabis investors to understand for the rest of 2021 and beyond.
“It means a lot of investment opportunity is coming but investors need to be selective,” Carroll wrote. Since the Democrats gained control of the White House and both houses of Congress, virtually every liquid cannabis stock is significantly higher. However, Carroll said the next stage of the cannabis stock bull thesis will be sophisticated institutional investors, and they will be targeting the best-in-breed stocks, potentially leaving the lower-quality stocks for dead.
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