This week has been devastating. Blood on the dance floor is the only way to describe it.
The markets were down almost 25% this week, with some stocks down as much as 40% in only the past 2 weeks.
I know some of you are panicking, and some of you are ready to simply dump the lot while there is still some value left, but this is not a new phenomenon, a once-off occurrence, or the end of the marijuana run. None of them.
This is part and parcel of the Cannabis Industry. Shares can go hyperbolic one week and then crash and burn a few weeks later. I have always maintained that if you cannot handle volatility, and want to look at the value of your shares daily, then this may not be the right game for you.
The key to marijuana is having a longer-term view and approach to investing. In this way, these short term periods of volatility are essentially meaningless. The only thing that matters is investing in shares that have considerable upside in the medium to long term.
The marijuana boom has only just begun. If you still don't believe you are early, then consider the fact that the 5 biggest countries and economies in the world have still not legalised marijuana for medicinal use at the federal level.
Medicinal marijuana…we're not even talking recreational yet.
Let's dig a little deeper into the past two weeks, and if you'll allow me the time, I'll explain why this is not an issue at all, and that in fact, these crash and burn periods create significant investing opportunities.
First off, let me reiterate that in the Cannabis Industry, investors buy the rumour and sell the news. Another way to put this would be to say that investors buy the mystery and sell the history. And legislation was a known event. In other words, it was known and planned for news.
The trading volumes really started to pick up in mid-August as exuberant US retail investors flooded into the market and started buying stocks in anticipation of legalisation.
And stocks start rising, and rapidly.
Fuelled by the Canopy-Constellation II deal, and on the lead-up to October 17th, the markets moved almost 35% up, with some stocks doubling in value in that time frame (Aphria went from $8 to $20).
And then, when the day came and legalisation rolled in, many of these same investors took their profit off the table. Indeed, this horrific run started on the day before legalisation and has continued ever since.
However, given we are so early in the game, and that there are numerous "events" coming in the next 12 months, there are going to be many, many more hyperbolic growth periods and associated investing opportunities.
First off, there are the mid-term elections. If the Democrats can balance the power in the House and Senate, then one could expect a flood of bills (most of which already have bi-partisan support) will go through and cement the status quo.
Note I have not said "legalise" but rather lock in the current environment. Ever since the good old Attorney-General, Jeff Sessions, tore up the Cole Memo in January of this year, there has been the cloud of potential federal intervention creating a massive overhang on the market.
This was greatly alleviated in April when President Trump came out and gave his word to Senator Gardiner that the federal government would leave the States to decide how to treat cannabis and would not interfere.
The market really moved on this news, and to his credit, to date, Trump has kept his word. This has led to a quantum shift in the US Cannabis Industry – better access to capital. Ever since April, there has been a flood of US-focussed companies listing on the CSE – MedMen and GTI to name just a few.
However, the fact of the matter remains that Trump could turn on a dime and this is what makes solidifying the status quo such a win. Should the States Act pass, this would create legislation protecting the states' rights to handle cannabis in the way it sees fit (this would include recreational legalisation).
This creates a water-tight environment for cannabis companies to operate in, and when this comes to pass, expect a massive run on the stocks as investors finally get the security they were looking for.
That's one "event". Another is The Hemp Farming Bill of 2018. The bill is set to be passed anyday now, and once passed, immediately opens up the $100 billion hemp industry to American producers.
The Farming Bill reschedules Hemp from its current Schedule 1 to schedule 2, allowing for the industrial production of hemp and its CBD extracts. This is the exact reason Coca-Cola are sniffing around the fringes. CBD infused beverages that operate in the non-psychoactive, wellness-facing category is going to be massive, to say the least.
Cannabis infused beverages have emerged as a high growth segment within the edibles category. Currently representing roughly 6% of edibles in mature US markets, and less than 1% of overall cannabis sales in the US according to BDS Analytics, revenue share for cannabis beverages should expand meaningfully over the next several years, outpacing overall cannabis retail demand by over 2x.
"We are estimating a 34% CAGR for THC infused beverages, growing from $106m in 2018 to $340m in 2022."
– Canaccord Genuity
And all of the big players are positioning for Hemp. Canopy Growth recently bought Ebbu (a Hemp IP-focussed company based out of Colorado). This is one of the prime reasons Coca-Cola is in alleged talks with Aphria.
Then, there's the potential recreational legalisation set to happen in New York and New Jersey sometime next year. While not as big as California legalising, these two States would put the East Coast firmly on the map and significantly open up the US.
And finally, in October next year, Canada allows the sales of extracts to the recreational market. This is game-changing as it is the fastest growing segment of the market, and is associated with very high revenues and margins.
Expect a significant uptick in revenues from the big LP's and upwards movement in the broader cannabis market. Speaking of revenues.
Another catalyst coming is Earnings season. For years this has been a pretty stock standard report. They're growing, they're burning cash, and they have very little revenues. However this season, the story will be quite different.
They're growing, and while they're still burning cash, their revenues should be significant. With sold out signs and lines around the corners of the dispensaries, the sales have been there – big time.
I think investors are going to be surprised at the kind of numbers these LP's are going to report, and with this excitement, should come upward movement in share prices.
But legislation itself has been one of the weights dragging the market down. There is so much unknown, and with uncertainty and doubt, investors normally run for the hills and get out as quickly as they can.
Uncertainty around things like what will happen when supply completely outstrips demand, and whether the demand itself will be as high as has been projected? Let's be clear on something, there is already enough supply when you consider that the demand is met by both legal marijuana and the black market.
Eventually, the licensed producers will start producing enough to drive out the black market, and from there, should be able to move the excess products into other markets. Remember, most countries have not even legalised marijuana for medicinal purposes yet, so there will be demand growing on a global scale.
Hence most of the excess production will be used to fulfill supply agreements with companies in the European Union and other international territories. And there is significant growth projections for these regions too.
And finally, the latest poll results from Gallup came out on Monday, and the numbers will surprise you.
66% of Americans now believe that cannabis should be legalised. 66%. That's more people that feel marijuana should be rescheduled than believe that Gay Marriages should be allowed. Get your head around that one why don't you.
Importantly, for the first time ever, 51% of Republicans and 51% of the population aged 55 and above, believe that marijuana should be legalised. This is massive as the older Rede voters were notoriously against legalisation.
75% of Democrats and 78% of the population aged 18-34 believe it is time the government lifts prohibition and legalises cannabis.
The tipping point has been reached and it is not a matter of "if", but rather "when" the US government finally opens the biggest consumer market on the planet.
As you can see from the above, the future for cannabis remains very, very bright.
Oh, one more thing. These crash and burn periods are actually awesome for investors. They create significant opportunities to dollar-average down.
For those of you that may have bought in near the recent highs, this is the best time to grab some more stock at considerably lower prices. And for those looking for an entry point to start your portfolio – it's Xmas come early.
This is the exact reason one should never buy all their shares in one purchase. If there is a stock you want to own, consider buying it in smaller amounts over a period of time. This is why having "cash" is so important, as it really allows you to take advantage of these periods of negative volatility.
Bottom line, cannabis stocks are extremely volatile, and while the industry remains nascent and fragmented, expect many more periods of immense volatility. But keep the faith friends, cause the future for marijuana has never been brighter!
And they told you money doesn't grow on trees.