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The cannabis sector is experiencing extensive growth all over the world right now. The future looks even better, as consumers - particularly in North American recreational markets - are set to fork over $57 billion a year for their cannabis by 2027, according to Arcview Research.
But as bright and lucrative as the future prospects of marijuana are, there's no getting around the fact that right now is a pretty tough time to be a cannabis investor.
Consider that the $782 million ETF Managers Tierra XP Alternative Harvest ETF (NYSE Arca: MJ) - the richest cannabis-heavy exchange-traded fund bought and sold in the United States - is down some 16.5% for the year.
Now, marijuana stocks are all affected to one degree or another by the domestic and international stressors pushing down stocks across the board, but it seems like all sorts of challenges have cropped up for an industry with such explosive potential.
So I'll tell you what I told folks at the recent National Institute for Cannabis Investors retreat that just wrapped up in Las Vegas: what's causing the trouble - and most importantly, when we can expect the juicy gains to start up again...
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Better to Get the Trouble Out of the Way Now
It's tempting to write off the cannabis sector's troubles as all tied up in stocks' well-documented, ongoing woes. But marijuana is largely - if not completely - immune to all the problems in international geopolitics, the oil patch, global trade, and so on.
Instead, it's homegrown trouble that's sent the sector lower.
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The firing of Canpoy Growth Corp.'s (NYSE: CGC) visionary CEO, Bruce Linton, in July showed that investors want results yesterday and are unwilling to give the sector's standouts time to get all engines firing. That gap between expectation and reality is rarely great for a stock's price.
CannTrust Holdings Inc. (CSE: CTST) is an example that there are some companies that thought they didn't have to play by the rules. I don't expect this to be the last company to get caught up in a scandal - there's never just one cockroach.
And then, there's the so-called "vaping crisis," which has by now claimed 19 lives and sickened more than 1,080. There's some debate over whether the frightening syndrome is new or merely newly recognized - but there's now compelling evidence pointing to a massive problem with adulterated thickening agents in illicit, black-market THC concentrate cartridges. As far as anyone can tell, no one who's used a licensed, regulated medicinal or recreational product has gotten sick, but that hasn't stopped patchwork vaping bans going into place in some states.
There have been a few other problems this year, but these have certainly been the biggest, most impactful.
Everyone has suffered, not least of all cannabis industry executives and insiders who are often the single biggest shareholders in their own companies.
But I think the worst is probably over...
There's a Bottom... and Much More Upside Ahead
More than anything, the valuations here hint at a light at the end of the tunnel.
The valuations on these stocks do not reflect the growth they are showing. That would make some sense if it were limited to the companies not yet generating significant cash flow, but even companies like Trulieve Cannabis Corp. (CSE: TRUL, OTC: TCNNF), which has been profitable for over two years, are suffering.
Meanwhile, as I've written, just about everything the cannabis industry said would happen is happening - especially in the United States.
So what we need for the good times to come roaring back is a catalyst, such as we saw in the weeks following Constellation Brands Inc. (NYSE: STZ) multibillion-dollar investment in Canopy Growth. I'm talking about an 80% run up in less than a month.
What might serve as "rocket fuel" this time around?
Well, I think the Senate sending the SAFE Banking Act to the president's desk would certainly qualify. The House of Representatives passed the bill. That was a definite positive, but one that had been more or less priced into cannabis stocks. The Senate is a tougher nut to crack, but I think we're in for a nice surprise; cannabis reform is one of the last remaining issues that enjoys broad, bipartisan support these days.
A "repeat" of the Constellation-Canopy deal, in the form of another consumer products juggernaut buying into the cannabis sector, would likely trigger another run higher.
I'm also looking for any development that would clear the way into cannabis for institutional investors, some of whom, like the Church of England, are already "in" certain cannabis stocks; we need more - many more - of these.
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Cowen Inc. (NASDAQ: COWN) analyst Vivien Azer may have gotten the ball rolling when she began covering U.S. companies that deal directly in cannabis. But the real change will be when some big mutual fund or insurance company reports that it has taken a big position in a large U.S. cannabis company.
The biggest, plausible bullish catalyst I can think of right now would be the removal of cannabis from Schedule I of the Controlled Substances Act. That would be an instant catalyst that would propel the sector to new highs almost overnight.
We can't know when that is going to happen, but it could be sooner than most people think. At the end of May, a federal court quietly ordered the Drug Enforcement Administration (DEA) to reconsider its position on cannabis as a Schedule I drug.
The DEA has no scientific basis whatsoever to keep cannabis on Schedule I. Politics could prevail here, but if the science wins out or the politics look at the increasing support for legalization, we could see this "largest of all" possible catalyst sooner rather than later.
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About the Author
Greg Miller started working on Wall Street in September, 1987, just a month before the “Black Monday” stock market crash.
During his career there, he became an expert in just about every kind of publicly traded security - from blue-chip and small-cap stocks to municipals, junk bonds, and derivatives. As a portfolio manager, Greg was responsible for over $500 million of assets in mutual funds and insurance company accounts.
After leaving the Street, he designed a successful options trading strategy and made lucrative tech investments for a financial publication. He has also helped develop new products and worked with other editors to hone their strategies. He’s always been dedicated to deep, fundamental research - and he always will be - because he believes buying the very best companies at the right price is the best way to amass wealth in the stock market.