Sorting through heaps of trash for morsels of food…
I can’t think of anything more grotesque than dumpster diving. And I bet you probably feel the same.
But today I’m going to ask you to come dumpster diving with me.
That’s because one sector has truly been thrown in the trash. Its sector has seen nearly two years of falling share prices.
And don’t get me wrong… it’s still mostly trash. That’s why I’m not recommending you buy an index fund.
No, we’ll have to sort through this dumpster for the scant stocks of value.
But it’s worth it.
Because there’s probably no easier long-term investment than these few names.
Selling Begets Selling
At one time, the cannabis market seemed like the easiest shot on goal.
After all, pot was already wildly popular… making drug lords billions of dollars annually.
Making it legal should have shifted those profits from the black market to the stock market.
But that’s not what happened.
Cannabis stocks surged ahead of Canadian legalization in 2018. Then they crumpled in on themselves, falling 53% within the year.
In the U.S., there was a second surge as dozens of states legalized medical use, and others approved recreational use… but that was short-lived, too.
Then Congress failed to pass bills to allow cannabis companies fair access to banks and capital markets. That’s made it much harder to run these as profitable businesses.
And through all of it, early cannabis investors started running for the exits… Even those that tried hanging on eventually capitulated and dumped their stocks in disgust.
Despite Falling Share Prices, Legal Access Is Expanding
Since 2020, a few marijuana ETFs have closed entirely, and others – like the Cannabis ETF (THCX) and ETFMG Alternative Harvest ETF (MJ) – are down 85% from their all-time highs.
We’ve also seen dozens of companies go out of business or lose nearly all their value…
Even the three biggest names in the industry – Curaleaf, Green Thumb Industries, and Trulieve – are down 18%, 29%, and 41%, respectively.
Yet at the same time, 37 states and Washington, D.C., allow medical use, and 21 states (and D.C.) enacted measures regulating adult recreational use.
That’s why I decided to take the rare opportunity to get an in-person mood check on cannabis stocks…
Last month, I attended the Money Show in Orlando. It’s a yearly conference for all things investing – from trading options to buying a stake in a Texas oil well.
And when I went to the only cannabis talk there, it was nearly an empty room.
That’s just one piece of anecdotal evidence… but this was just three weeks after President Joe Biden asked the Drug Enforcement Administration to reconsider cannabis’ status as a Schedule I drug.
And a year or two earlier, these presentations would be buzzy with excited chatter.
But while there’s certainly an apparent lack of interest in cannabis stocks right now, don’t mistake a lack of interest for lack of progress.
Sales are Booming
I know talking about investing in cannabis stocks seems insane, given everything going on in the world. But even amid inflation and a potential recession on the horizon, legal cannabis sales continue to climb.
In fact, the top three U.S. producers have grown topline sales by 27% over the past year…Yet shares of the three are down 29% over the same period.
Combined, these top producers are trading at a price-to-sales ratio of 3.4 – cheaper than the real estate or technology sectors… and just a bit more expensive than stalwarts like consumer staples.
The big difference is that the cannabis sector offers much more upside.
Sales are expected to balloon from $33 billion to $52 billion by 2026. That’s 10% annual growth. And the cannabis sector is one of the few that has consistently beaten growth expectations.
Friends, I get it. You probably think pot stocks are trash. Maybe you’ve even dumped your shares during the downturn…
But I believe the next year will be a turning point… even without big catalysts like federal legalization.
We just need to see sentiment change from “hated” to “neutral” for double-digit gains.
But don’t buy any ETFs. They still hold a lot of garbage.
Instead, look for the biggest operators that are profitable or near it… These are the best-run companies in the sector. And they’re the key to profiting from the change in sentiment.
Names like Curaleaf and Green Thumb Industries are a good place to start your research but plan to hold anything you buy for the longer term.
I’m fairly confident we’ll see a resurgence in the legal cannabis sector, but it’ll likely take more time. Don’t expect a quick turnaround.
So if we see another downturn in the next year or two – despite increased legal access and sales numbers – do not sell unless you have a fundamental reason for it.
Invest with conviction,
Analyst, Palm Beach Daily