Cannabis Investment

Is marijuana really the next big investment opportunity? That crucial question is the focus of this article.

Before we can fully explore that question we must understand the current state of the marijuana market and what the future looks like. If you mention the word marijuana to anyone over the age of 60 the immediate response is ‘That is illegal!’ And they are dead right, it is illegal. But like most things, the word ‘illegal’ is relative.

Let us start by providing you with a smattering of random facts about marijuana that will provide you a taster for the subject before we dive into the detail.

A Few Interesting Facts to Kick off

• According to the 2019 edition of the United Nations’ World Drug Report cannabis is the most widely used drug in the world with an estimated 188 million people have used it over the previous year
• At least 135 countries representing 92% of the global population engage in some form of cannabis cultivation
• Cannabis is native to India and Central Asia
• The US market is by far the biggest — representing 25% of the total cannabis market, with only 5% of the population (incidentally, cannabis and marijuana are interchangeable words — cannabis is easier to spell!)
• At a federal level in the US cannabis is illegal
• Recreational marijuana is legal in only two countries, Uruguay and Canada.
• In December 2018, the 2018 Farm Bill in the US was signed into law, this allowed for the legal growing and distribution of hemp and cannabis with no more than 0.3 percent THC (see definitions below)
• In 2018 over forty million Americans reported using cannabis
• Two-thirds of Americans favor cannabis legalization
• In the US thirty-five states have a medical cannabis program and eleven are fully legal including both medical and recreational (as of November 2020).
• By 2024 the US legal cannabis market is set to be worth $42bn from its current level of around $13.6bn.
• The legal cannabis market grew by 42% in 2019, total cannabis sales grew more than 30% for the fifth consecutive year
• Over 260 million adults worldwide consume cannabis at least once per week, collectively spending $344 billion (Source: New Frontier Data)
• Approximately 20% of the US adult population consume cannabis, whilst 12% are consistent consumers
• California is the biggest market in the world
• In 2020, it was found that the average amount each US cannabis consumer spends annually on cannabis products range between $500 to $2,500
• Although cannabis is legal in Canada estimates are that the black market represents 71% of the market
• US operators have the best technology, genetics, growing conditions, and product innovation in the world despite being restrained by federal law

Cannabis Stocks — Background

Pot stocks, as they are affectionately known, are a little different from traditional stocks. One major difference is that publicly traded stocks on major exchanges usually have at least 70% of their shares held by institutional investors. Pot stocks however are reliant on private sources of capital to fund their business which means that retail investors typically make up 91% of cannabis stocks investor base. This makes for a very volatile stock price.

Generally, Canadian cannabis companies can list in the US and the Toronto Stock Exchange (TRX). US-based cannabis companies however have limited options. Exchanges in the US are out of bounds for them. Their options are restricted to the US over the counter market (i.e. matched bargain) or a listing on the smaller Canadian Stock Exchange.

Investors wanting exposure to the US market should be targeting US-based companies as their Canadian counterparts are unable to operate in the US (although a few have been shrewd enough to negotiate options or bought small stakes in their US brethren, one such example is Canopy Growth 21% holding in TerrAscend). Although Canadian cannabis stocks do have potential with their ability to export to other markets in our opinion the action is in the US.

Stock Picking

If we have time on our hands, spare cash, and a penchant for risk then perhaps picking your own pot stocks is an option. Many of these stocks have increased in value by over 300% from their low point in 2020 thus already factoring much of the good news in the market.