If You Think Marijuana Stocks Are Finished, You Haven’t Been Paying Attention

Marijuana Stock Recovery

A lot of people like to play the smarmy know-it-all, saying “I told you so” when an investment turns out poorly. That’s especially true when it comes to marijuana naysayers, the ones who will dump on pot stocks during every market correction, only to end up looking foolish when the next recovery rolls around.

I see this a lot and tend to let it pass, but I was especially peeved by a recent piece in the Financial Post that I felt properly summed up the erroneous thinking about the legal marijuana industry. This time, I decided it was in need of a rebuke.

Here’s the title of the piece: “Feeling burned: The first year of legal cannabis has been a complete disaster for investors.” (Source: “Feeling burned: The first year of legal cannabis has been a complete disaster for investors,” Financial Post, October 9, 2019.)

That’s… stupid. Sorry for the harsh language, but that’s such a fallacious title that I’m surprised it was published.

Now, if the article had said the last three months have been a total disaster for marijuana stocks, it would still be partially wrong (some pot stocks have seen big gains during that time), but it would also be largely right; many weed stocks have been wrecked in that period.

But you have this proclamation that investors who bought in the post-legalization period have been “burned” by the marijuana sector.

Let’s take a look at that assertion.

Chart courtesy of StockCharts.com

The above chart shows the price performance of some of my favorite pot stocks, several of which I’ve been bullish on for over a year.

As can be seen in the chart, each of those four stocks more than doubled in value by May 2019, a full six months after marijuana legalization in Canada. Indeed, if investors had bought in on January 1, 2019, and sold any time by August, they would have made well over 20% returns, even making as much as 100%, depending on the exact timing of the sell-off.

So no, many marijuana investors were not “burned” over the past year. Cannabis stocks have had a difficult few months, no doubt, but to say that 2019 has been a bum year for weed stocks is a fiction.

And then the article brings in a number of doomsayers claiming that the marijuana stock market is finished.

“A psychological shift has taken place from everyone wanting to own (cannabis) to everyone involved now feeling burned,” said Richardson GMP portfolio manager Chris Kerlow. “I think many investors are now over (cannabis).” (Source: Ibid.)

And then the very same article cites a well-known fact that only 25 legal marijuana dispensaries are in operation in Ontario, which is Canada’s largest and richest province, after a whole year of legalization.

On top of that, we still have billions of dollars being siphoned away by the black market.

What this means, then, is that there is still so much room for marijuana stocks to grow and regain their former highs. And there are a number of catalysts that could facilitate the marijuana recovery.

The Canadian marijuana market is just getting started, and the naysayers who like to tut-tut nascent, admittedly volatile, industries are the same people who like to play Monday-morning quarterback. When markets are down, they’ll say they told you so, and when markets are up, they’re nowhere to be seen.

Marijuana Stock Recovery Factors

Now that we’ve dispensed with that very silly article, let’s tackle what sort of events we can expect to help resurrect the Canadian marijuana market.

The first is the most obvious: regulators need to get out of the way. Ontario, in particular, has had an extremely slow rollout for marijuana, and many other provinces are in similar states of disarray.

Supply shortages have been a problem nationwide, and it’s not a matter of legal marijuana companies not having the supply capacity, but instead, it’s a function of regulatory burdens getting in the way of industry growth.

While we do want a healthy and safe legal marijuana market, there is such thing as overdoing it, and Canadian regulators are guilty of just that.

Speaking of governments getting in the way, the tax on marijuana and the onerous compliance measures have led to legal pot being far more expensive than it ought to be.

Couple that with the fact that the still-thriving black market faces no such costs and you have a situation in which illicit weed is far cheaper than legal weed, with little difference in quality in most cases.

After all, marijuana has been under the purview of illegal operators for decades, and people trusted them pre-legalization. That customer loyalty did not suddenly evaporate post-legalization.

And the move to combat the black market has been slow and inconsistent, with governments doing more to harm legal pot than help it. When they eventually choose to shift their focus toward combating the black market—or at the very least lowering the price of legal weed by reducing taxes and regulatory burdens—the price growth for marijuana stocks has the potential to be exponential.

And then, of course, we have the elephant in the room: Canadian marijuana companies aren’t, strictly speaking, Canadian. Sure they’re based in Canada, but many of them have operations around the globe, on nearly every continent.

If the United States were to legalize marijuana, there would be many opportunities for established marijuana companies to enter the U.S. market and take advantage of a resurgence in marijuana stock excitement.

These are ways that marijuana stocks could see massive growth in the next 12 to 24 months, and yet they are not mentioned at all in the Financial Post article.

A marijuana stock market recovery isn’t only likely, I’d argue it’s almost guaranteed. As such, long-term, I’m still very bullish on pot stocks.

Analyst Take

Investors should not be fooled by marijuana doomsayers; the industry is far from kaput.

Marijuana stocks still have tons of potential, and the investors who are abandoning ship now and saying that cannabis stocks will never sail again are going to look silly when those stocks zoom right past them on the way to greater gains.