Whenever anyone wants to discuss cannabis stocks with me, particularly as it relates to investing in cannabis stocks, I only have two things to say to them.
– The Cannabis industry is extremely speculative
– Cannabis stocks are extremely volatile
Potential cannabis investors must understand how speculative this industry is. To put it bluntly, the world's four largest economies still have not legalised cannabis for medicinal purposes only, at the federal level. No matter what people tell you, we are still early on in the game.
As a result of the industry being so speculative, this, in turn, filters down to the individual companies themselves. There is still no certainty as to which companies will end up leading the pack, and which will simply wither and die (taking millions of shareholder's dollars with them).
If you're reading this, then I am going to assume (what did they say about assumptions?) that you have some interest in cannabis stocks and are either waiting to pull the trigger and start investing, or have already started investing.
I am then further going to assume (it's getting worse) that you are concerned about investing in the cannabis industry because right now the markets are in decline.
Cannabis stocks have a higher Beta than normal stocks. In layman's terms, this means that when the stock market is going up, cannabis stocks will go up more than the market. But, if the market is going down, then (on average) cannabis stocks will fall even more.
Right now, there is uncertainty in the market, and nothing hurts the market more and gets investors more frazzled than uncertainty.
It starts with Donald. The whole US-China trade war uncertainty is really weighing heavily on all markets. An economic showdown between the US and China is good for no one, with the IMF warning that a full-blown trade war would significantly weaken the global economy.
Staying with America, there is uncertainty regarding cannabis legislation and the continuing conflict between State and Federal law. Cannabis is still illegal at the federal level, even though it is now recreationally legal in 10 States and medicinally legal in 33 US States.
The weed uncertainty for investors relates to revenue outlooks, supply constraints and quality issues that significantly impact a company's ability to scale and generate operating leverage.
With uncertainty comes a falling market, and this is what we have seen in the early part of this year's second quarter. But one needs to take a slightly longer-term approach than one or two quarters (unless of course, you are actively trading).
This is an industry that is set to grow at a compound annual growth rate of 15% for the coming 5-10 years. We agree that every research house you speak to has a different number and potential of what the market might be worth in 2028. Truth be told, none of them know.
But it doesn't matter if it's going to be worth $20, $30 or even $50 billion by 2025, the point is that given its sitting at around $11 billion now, the US market is set for phenomenal growth in the coming years. In the medium to long term. We have always maintained an investment timeframe for the cannabis industry of at least 5-10 years. In other words, the medium to long term.
We believe this to be a 10-year bull run for the cannabis industry (a bull run indicates that the markets are rising). We believe that over the next 10 years, there will be significant growth in the value of certain cannabis companies. That's not to mean that there will be no declines. FAAAAAAR from it.
As you can see from the Aurora Cannabis graph above, it has risen beautifully over the past couple of years. However, there have also been periods of great decline, and these give rise to opportunities.
Recent volatility in cannabis stocks, with some falling in the past couple of weeks, may just present an ideal opportunity for investors looking to buy the dip.
Buy the Dip
Buying the dip refers to purchasing a stock after it has declined in price.
Some traders are buying the dip if a stock is in a long-term uptrend, which they hope will continue after the dip. While others may use the phrase when no uptrend is present, but they believe an uptrend may occur in the future. Therefore, they are buying when the price drops in order to profit from a potential future price rise.
We believe the current market presents a fantastic opportunity for investors looking to take an initial market position and buy a few shares, or even dollar-average down their cost base, by buying this dip.
"Investors will use "this downturn as a buying opportunity as most are convinced that this sector remains a second half 2019- 2020 story."
~ Cowen & Co.
Cowen & Co.'s Andrew Stein says investors have been moderating their expectations, but it won't impede longer-term gains. He highlights Tilray as an example, which has fallen more than 25% this year. Shares of the Canadian company have seen bullish trends recently as investors become more willing to add to their positions at a price near $50, per Barron's.
We certainly believe there will be more volatility ahead. The industry is still very much finding its feet, and some steps forward are often met with a step or two backwards.
In October 2018, Canada became the first G-7 nation to legalise cannabis for recreational use at the federal level. However, the Canadian cannabis market has gotten off to a slow start and has disappointed everyone by posting sales that are well below investor expectations.
In November 2018 Michigan became the 10th US State to legalise for recreational use. It was thought that this was going to be the driving force behind NY and NJ legalising, only for both to postpone it now.
Cannabis stocks are likely to face more market choppiness due to regulatory concerns and other risks, but we have a 3-5 year view on this and are focused on the long-term growth opportunity of the booming cannabis industry.
Simon Moore, in his Forbes article, said, "Just like Paul Samuelson's joke about how economists predicted nine of the last five recessions, so the stock market tends to cry wolf frequently and dips are often temporary rather than heralding a new crisis. There's always something to worry about in the markets, but real bear-market inducing problems for stocks come along less frequently than bouts of worry do."
We're buying the dip.