By Jason Wilson
As more states continue to move towards legalizing cannabis, combined with the future uptick in sales from states such as New York and New Jersey that have recently legalized recreational cannabis domestic cannabis sales will continue to experience strong growth.
Looking beyond 2022, domestic sales growth should remain strong for the foreseeable future as the federal government presumably approves some level of cannabis reform, as additional states take steps towards legalizing cannabis, and as more first-time/canna-curious consumers enter the market in states that are currently legal.
Demand for premium flower is expected to remain strong, in the longer term. As the cannabis industry continues to mature, expect to see the strongest sales growth in derivative products such as cannabis-infused beverages.
The cannabis landscape is similar outside of the U.S. – more countries are expected to legalize in the near future, including Germany and Italy in Europe and Mexico here in North America, and more first-time consumers continue to transition to cannabis-related products in existing markets – both factors will create a larger global addressable market.
As such, expect to see continued strong global sales growth over the next several years, in both the medical and recreational markets, and would be surprised if global cannabis sales do not breach the $35 billion mark in 2022.
Here are a few key questions to consider:
Is now a good time for investors to invest in cannabis?
Current cannabis company valuations and continued industry growth support continued investor focus on the sector. Global cannabis sales grew from approximately $21 billion in 2020 to $29 billion in 2021. Looking forward, the upward trend is expected to continue – global cannabis sales are expected to exceed $35 billion in 2022. Notwithstanding this strong industry growth, combined with a general improvement in corporate fundamentals, most cannabis companies are currently trading near 52-week lows.
What are the pros and cons?
Pros: The cannabis industry is still in its early stages, and multiple factors support its continued growth (both domestically and globally): the size of the total addressable market has expanded as more states and countries move to legalize cannabis, increasing the number of consumers worldwide that can legal buy cannabis and cannabis-related products; beyond the growing number of new legal markets, the number of consumers in existing legal markets has been increasing as canna-curious customers transition to cannabis and cannabis-related products; and transaction volume among existing customers in established markets has increased as the number of dispensaries has grown and purchaser experiences has improved.
Cons: Cannabis stocks prices will remain volatile and are likely to continue to trade more on the outlook of U.S. federal legalization than corporate fundamentals.
The House just passed the MORE Act what does this mean?
The House passed cannabis reform bills several times, but the larger issue remains whether it will be passed by the Senate. So, I do not expect to see any meaningful impact on the prices of cannabis stocks until we have more clarity on what the Senate will, or won’t, table with respect to cannabis reform legislation.
What are the top picks for investing in cannabis?
With respect to investing in a new and emerging industry where there are many unknowns, such as cannabis where we still do not have a roadmap regarding a federal regulatory framework, I believe it make sense for most investors to take a diversified approach to investing versus attempting to select specific companies to invest in. A cannabis-focused ETF, such as MJ or MJUS which both trade on the NYSE (MJ provides exposure to the global cannabis industry, while MJUS only invests in U.S. focused cannabis companies), provides exposure to a diversified portfolio of cannabis companies. There are several benefits to investing in ETFs relative to investing directly in a portfolio of stocks aside from diversification, including transparency (with daily visibility, investors know exactly what they are investing in regarding what securities the ETF holds, how the ETF is performing, and the costs associated with investing in the ETF), liquidity (ETFs can be bought and sold on an exchange at market price, often at better spreads and with better liquidity than the individual portfolio holdings), and cost (buying shares of an ETF on an exchange can be accomplished in one trade, versus the many trades it would require to purchase a diversified portfolio of stocks).
What’s next for cannabis legalization?
The outcome of the House vote on the MORE Act is only the first on many steps towards federal legalization. With public support for federal legalization at an all-time high, it seems that is more a matter of if, not when, we will have substantive reform at the federal level. However, many other cannabis bills are being circulated so it is not clear, nor expected, that the MORE Act will be the piece of legislation that ends cannabis prohibition. Regardless, it is positive for the industry that lawmakers are focusing on the issue again.
Jason Wilson is ETFMG’s Cannabis and Banking Expert. ETFMG is the issuer of the MJ ETF.
