In 2017 and 2018 investors piled into cannabis stocks as word spread of the “next big thing.” Canada made global history when it became the second country in the world and the first G7 nation to federally legalize cannabis. Emerging players spoke of big plans which stoked investor enthusiasm. Amid the initial excitement legislative progress was slow and competition in the stifled marketplace kept prices low . By April 2019, early stage growth hiccups caused share prices to change direction, since then the vast majority of pot stocks have seen a 50% decline in value.
The cannabis industry may not have been the explosive growth opportunity that early investors had anticipated, but there is still tremendous long-term upside. In fact, Investors who are optimistic that the U.S. will lift the federal ban are expecting their investments to double or triple over the next few years.
A driving force behind the legislative progress being made is that states need more revenue. This is true now more than ever in the wake of COVID-19. Many states could consider legalizing marijuana as a way to boost revenue while avoiding unpopular moves like raising taxes. Colorado set a great example for other states to follow. In 2019 the state surpassed $1 billion dollars in marijuana tax revenue.
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Currently nine states and Washington D.C. have legalized recreational marijuana, while 29 states have legalized medicinal use. We might not see the federal ban lifted in the very near future, though some say it’s inevitable, progress is steady at the state level.
Marijuana is already a large industry, with an estimated $12 billion in U.S. sales for 2019. By 2022 U.S. sales could top $22 billion. Investors won’t find many industries that could nearly double in three years.
Along with the possibility for tremendous upside opportunity, uncertainty is there. No one can predict when the big legislative changes will occur or how taxation will affect costs. Stock selection is critical in the Marijuana space. Investors should look for companies that are competitive and have the liquidity to sustain.
While pot stocks will need time to mature, a handful of companies are in position to be successful earlier than their peers.
Canopy Growth (NYSE:CGC)
Canopy Growth Corp. is the largest legal cannabis company by sales and market cap. Currently CGC’s share price is down by 18% after plunging more than 50% during the first few months of the year and 68% lower than its 2018 all time high.
Canopy is one of the most cash-rich companies in Canada. As of March 31st, the company’s gross cash balance was $2 billion Canadian.
Could this be an excellent opportunity for investors to buy shares of Canopy while they’re cheap?
We are bullish on Canopy’s long-term outlook, given its leading market share, its solid balance sheet, and its financial backing and support from investor Constellation Brands (STZ).
Constellation Brands Inc. (NYSE:STZ)
Constellation Brands offers a less risky way to invest in the cannabis industry through its diversity. Constellation Brands is the third largest beer company and a leading high-end wine and spirits company in the U.S. It has a strong portfolio of high-quality brands including Corona, Modela Especial, Robert Mondavi and Svedka.
The relationship between Constellation Brands and Canopy Growth began in 2017 with Constellation taking a 9.9% stake in the Canadian pot company. On May 1st the company announced it would be upping its ownership to 38.6%. That’s a renewed vote of confidence in its Canopy investment and offers investors a way to invest in Canopy while also profiting from the 8 year winning beer sales streak and growing wine and spirits market.
GW Pharmaceuticals (NASDAQ:GWPH)
GW Pharmaceuticals is a biopharmaceutical company that specializes in cannabinoid-based drugs, including its federally approved epilepsy drug Epidiolex. GWPH offers an opportunity for investors to buy into the production of a celebrated drug with proven results that is totally legal on the federal level.
The drug’s recent descheduling by the DEA has cleared a path for more treatment possibilities. Epidolex is under review for label expansion to treat tuberous sclerosis complex, approval could come very soon. European Epidiolex launches are currently underway and GW has plenty of other promising projects in the pipeline.