Cannabis Turnaround Is Just Getting Started

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In the last few weeks there has been some renewed optimism in the cannabis industry, after March sales numbers revealed that monthly cannabis sales crossed $180 Million across all of Canada, which represents a 19% gain month over month. Although much of it can be attributed to people stocking up at the start of the lock-down, these are still very good monthly sales growth numbers, that demonstrate the resilience of the industry during even a harsh economic climate (1).

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Vice industries usually have performed well during times of economic uncertainty, but there are real catalysts that are here to support an upward move for companies in the cannabis space, including federal legalization in the USA. Looking back at the Great Depression, one of the economic solutions carried forward by the US government was to end its 13 year prohibition program on alcohol. The same reasons that forced the government to put an end to prohibition on alcohol, could be in play for cannabis. This could very well be the end of the country’s unjust stance on the policy of marijuana prohibition (2).  

Decriminalization Will Aid In Tax Revenues

The need for increased tax revenues as state governments across the US are starved for funds is getting more and more imminent, as the real unemployment figures continue to remain high, along with reduced consumer spending. The opportunity represents billions in yearly contribution to state and federal budgets. The Canadian government which recorded tax revenues from cannabis of around $66 million in 2019, expects the number to grow to $220 million by 2023 (3). The other thing to note for law makers in the US, would be that federal legalization would lead to a reduced burden on money spent towards incarceration of individuals for a marijuana related crime, as well as freeing those who are already serving time for possession of a harmless substance. In fact, 67% of Americans are now in favor of cannabis legalization, which is up 30% from just 20 years ago(4)! Over time there is evidence, that the legal market would be able to displace a significant portion of the black market assuming excise tax rates are set fairly, given the larger scale that most LP's are able to produce at. 

Ontario Continues To Be Underrepresented

Other catalysts for cannabis include right here in Ontario; continued store openings which are expected to pick up in the summer. It continues to represent huge untapped potential for cannabis producers as well as the Canadian government. Slow store roll outs within Ontario is currently the biggest reason why growers aren't seeing sales at their full potential, and why tax revenues remain lower than expected. Ontario's population represents about half of the entire Canadian population, yet accounts for some of the lowest per capita spending when compared with other provinces such as Alberta.

Per Capita Cannabis Sales Comparison - 1. Source: Statistics Canada. 2. Based on 2019 sales. 

My Top Pick To Capitalize On The Opportunity

This article won't be about which cannabis stocks are the best to invest in at the moment, as individual LP's may be too risky of an investment for many. Rather, my recommendation would be to go with the Horizon's Marijuana ETF (HMMJ on the TSX). At close to C$8 per share at the time of this writing, representing a 12.5% yield, long term investors in the space can't go wrong with such an attractive entry into the space. The dividend yields have remained consistently high since the ETF was introduced. Investors can gain exposure to the industry as a whole rather having to pick between individual marijuana companies, and gain exposure to multiple catalysts that will propel the industry forward in the upcoming years.

References

  1. COVID-19's Surprising Impact on Cannabis Sales
  2. Cannabis Legalization Is Key To Economic Recovery
  3. Cannabis taxes not bringing the cash government expected
  4. 67% Of Americans Favor Marijuana Legalization In 2020, Up From 37% In 2000: Study

About The Author

I am an electrical engineering graduate from Carleton University, and have always had a keen interest in investing. I have been following events as they unfold in the cannabis space in Canada since 2017 and have always had the opinion that decriminalization is the way to go as it reduces drug related crime and can be monetized as a source of tax revenue for the government. My goal is to help people who invest in a risky space like cannabis understand what to look for, as the amount of information available is often overwhelming for new investors. Aside from that, there are several companies all competing with each other to get your investment dollars!

 

 

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