Is legal cannabis a good investment in 2019?
The vast growth of the cannabis industry is mainly attributed to the several health benefits of cannabis. Other than pot smokers and medical users, stock investors have also gained interest in legal cannabis. In recent months, stocks with the most trading volume were cannabis related. Most emerging sectors have often attracted investors who are looking to benefit from untapped markets, and the cannabis industry is no exception. Although this emerging sector still carries a lot of uncertainty, especially with laws and business models continuously evolving, here’s why 2019 is set to be a more stable year for the cannabis industry:
The “Pop” Already Happened
Cannabis gained much popularity in mid-2018 after major brands poured billions of dollars into the Canopy Growth. That pushed marijuana stocks mainstream and many investors quickly took advantage of the momentum and bought in. The stocks, however, reduced drastically after Canada’s legalization of marijuana in October. Although there was a sense of disappointment among investors at the time, the big pot stocks bubble already popped. This essentially means more stability moving forward.
Major Investments Could Help Reduce Volatility
Following Constellation’s earlier investment in Canopy, several major brands are investing in the legal cannabis industry as well. For instance, Altria recently invested massively in Cronos Group. Generally speaking, the more large sums of money move into the industry, the more tangible support it gets in form of expertise, distribution, marketing, resources, and branding. Such huge investments are a sign of confidence in the industry and will provide stability to these stocks. Also, consumers are already using cannabis in bulk and thanks to technological advancements –check out Trimleaf’s guide to the best rosin press– the industry has the ability to produce billions of dollars in profits and revenue.
Valuations Are Settling Down
Unlike before when valuations in the cannabis industry were supported by technical analysis, now long-term investment decisions can be based on fundamental analysis. An example are the Big 4 marijuana stocks in the Canadian legal cannabis world (Canopy Growth, Cronos, Tilray, and Aurora) whose combined market cap is currently at $26 billion as opposed to the over $40 billion experienced a few months ago. This shows that valuations which were highly speculative in the past have begun to settle down and investors can now get a better sense of operating margins, as well as, other concerns. Ultimately, more stable valuations mean fewer investment surprises down the line.
Financials Will Catch Up
Although the excitement for legal cannabis stocks was high in 2018, there seemed to be a significant disconnection between valuations and financials. Financials will, however, have a chance to support valuations in 2019 and reduce volatility in the process. The Big 4 already have their first quarterly figures since the legalization of marijuana in Canada, and the growth rates are impressive; we are talking over 100% in revenues and volume growth. Such impressive growth rates are bound to be seen throughout 2019, leading to much larger revenue bases that will support valuations in cannabis stocks.