How The Third Wave in Cannabis Stocks Begins
The Rally May Be Sustainable A quote by legendary investor Howard Marks of Oaktree in the New York Times in early March caught our attention: There will come a day when we reach a bottom. We have no idea when or where that bottom will be. But all great investments begin with discomfort. You make the big money buying things no one else will buy. Of course, he wasnt speaking directly about cannabis stocks. His comments, which were just two weeks ahead of the S&P 500 low (at least for now!), certainly apply as well to cannabis stocks. We ran a survey in this newsletter, and the respondents were overwhelmingly negative right at the bottom. Its always a challenge to call a bottom in real-time, and calling one in the cannabis sector has been an exercise in futility. We shared our view that the bottom for cannabis stocks was likely in with subscribers at 420 Investor the evening Aurora Cannabis reported, though we had certainly expressed our belief that the bottom was possibly in much earlier. For the past two months, we have been discussing our views regularly that while many cannabis operators are likely to be crippled or bankrupted by the escalation of the capital crunch, those that are able to survive will actually thrive, and investors seem to have picked up on this. Three of the top four MSOs and Canopy Growth are outperforming the S&P 500 in 2020. Several ancillary companies in the U.S. are up year-to-date, including GrowGeneration (62%), Innovative Industrial Properties (9%) and Akerna (6%). The Third Wave for Cannabis Stocks From our perspective, interest in the sector has just started to return. We expect that a lot of stocks that are rallying could be dead-cat bounces and short-squeezes, but, at the same time, those companies with strong access to capital, good cash flow and defensible valuations could offer investors outsized returns ahead. We note that the four largest MSOs lagged the overall market move since May 13th, with returns ranging from 12.5% to 29.2%, all less than the 37.8% market move. Finally, we think valuations for public stocks are better than they have ever been, and expectations are certainly tempered regarding growth prospects. We believe the market is transitioning to what we are calling the third wave for cannabis stocks. The first wave began in late 2012 or early 2013, when there were few publicly-traded cannabis stocks and few that were even real companies. The legalization in Colorado sparked a massive rally that petered out until early 2016, when the second wave began. This next phase saw Canada move forward with legalization for adult-use and many states legalize as well, including California. The second wave peaked as California implemented its legalization and was followed by the 2019 vaping crisis and then the pandemic. The third wave is likely to see regulatory reforms in the U.S. at the state level and possibly the federal level, more states embracing adult-use cannabis such as Arizona, Florida, New Jersey, New York and perhaps Pennsylvania, improvements in key markets like Canada, California and Massachusetts, that have been slow to roll out, well funded private MSOs debut on the public markets and the first cannabis public companies to exceed $1 billion in revenue annually. This next rising tide will not lift all boats, but we are optimistic that investors who follow fundamentally sound companies could enjoy better returns ahead after two straight years with market declines of 34% in 2019 and 55% in 2018. https://www.newcannabisventures.com/how-the-third-wave-in-cannabis-stocks-begins/