The year 2020 was a filibuster year for the American cannabis industry. Three more states voted to legalize cannabis after voters supported medical or recreational legalization. The MORE Act that proposed decriminalizing and legalizing cannabis at the federal level passed the House of Representatives with bipartisan support.
The political landscape in the U.S. changed quickly. The MORE Act was given a low probability of being approved by the House of Representatives. However, it was ratified. Next, federal legalization of cannabis would be voted on by the Senate. It was expected that in early 2021, the Republican-controlled Senate would not approve the MORE Act.
The U.S. Senate was flipped, and the Democratic party held the Presidency, the House of Representatives, and the Senate (thanks to a runoff race in Georgia). Historically, Democratic representatives have been in favor of the federal legalization of pot. The MORE Act had been given a zero chance of being ratified by the Republican-held Senate. But the last roadblock of federal legalization may have been removed by voters.
If the United States legalizes cannabis and transforms it from an illicit substance to a regulated one, what will happen? Naturally, you can expect cannabis sales to go up. Quickly. The federal government has already proposed a 9% excise tax on all sales (adult-use and medical). But if you purchase cannabis stocks right now, are you bound to see a hefty return on your investment? Or lose money if federal legalization goes through in 2021?
Cannabis Company Valuations May Be Off
When something is new, it is novel. In business, being the first to penetrate a new and high demand market is a big advantage. When dispensaries open in a region, there is generally little to no competition. Some states still lack sufficient dispensaries (medical or recreational) to serve patient and consumer demand.
But as a state medical or adult-use program grows, so do the number of licenses issued to cannabis businesses. From cultivators and growers to processors and retail pot shops, everyone wants a piece of the action. As quickly as possible. For this reason, and to keep a tight grip on regulatory requirements and quality control, many states limit the number of licenses they issue.
One scenario is a multi-state operator that enters a new state, which has just legalized medical or recreational cannabis. The state may limit licenses to a maximum of twenty retail locations. As cannabis sales escalate (and they do in almost every market), a problem with supply and demand occur. Frequently, there is more demand than supply.
The Number of Operator and Retail Dispensary Licenses Can Change and Impact Revenues
Because state regulators want to keep legal cannabis accessible, they may decide to issue more licenses. This has resulted in a few cases of class-action lawsuits filed by cannabis business owners. They invested heavily with the assurance that there would not be excessive competition. Being one of twenty dispensaries in a state guarantees a certain share of the revenue. But being one of more than 2,200 licenses issued (as was the case with Oklahoma) and supply will exceed demand.
Because the legal and social landscape of cannabis in the United States is continually changing, company valuations may be inaccurate. They may be based on the initial level of competition before the growth of the statewide cannabis market. And that can be misleading for investors. And also contribute to highly volatile stock performance for vertically integrated multi-state operators or smaller dispensary franchises.
Federal Legalization Also Means the Potential of National Retail Sales and Distribution
Shipping cannabis products over state borders (even between two legalized states) could result in a felony offense. But if federally legalized, there is nothing to stop a large manufacturer from dominating cannabis e-commerce, with the freedom to ship products nationally. Imagine being able to buy pot on Amazon? It could happen. Or in Walmart?
Investopedia published their top three picks of cannabis stocks for 2021. These companies show the best value (low buy-in rate per share) and the fastest growth.
- Harvest Health & Recreation Inc. (HARV.CX)
- Village Farms International Inc. (VFF.TO)
- OrganiGram Holdings Inc. (OGI.TO)
The fastest-growing corporations and stock options in the American cannabis industry
- Jushi Holdings Inc. (JUSH.CX)
- Cresco Labs Inc. (CL.CX)
- Curaleaf Holdings Inc. (CURA.CX)
Consider that national retailers could get in on the action. Or that multi-state operators could expand rapidly into national providers. Would companies that are expanding now be a good investment? Are they poised to dominate the market if marijuana is federally legalized? It is probable.
Consider Pot Stocks Your High-Risk Long-Shots
Every investment portfolio should have high-risk stocks with the potential of high returns. But it is important to remember that they are always a gamble. If you diversify your stocks, consider cannabis-related businesses to be one of those high-risk options—particularly dispensaries and cultivator or processing operations.
Ancillary Cannabis Businesses May Yield a High Return
While everyone clamors for dispensary stock options, some of the smarter investors are looking at ancillary services. A trucking company that specializes in transporting cannabis. A new national bank or division of a chartered bank dedicated exclusively to cannabis businesses?
Travel, tourism, and the restaurant industry may also present lucrative stock opportunities if cannabis is federally legalized. Will fast-food chains offer infused menu items? It could happen. Manufacturers of cannabis seeds would see a spike in demand from commercial customers and consumers who could grow from home.
Mike Tyson is building Tyson Ranch near Death Valley, California. A visionary nod to the future of cannabis recreational resorts. When the global pandemic has subsided (and it will) and people are free to travel once more, cannabis resorts could see a windfall. And it may be worth getting stocks in the THC tourism sector earlier, rather than later.
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