The Amazing Retail Cannabis Boom

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Cannabis stocks are currently in their Wild West phase.

It’s beautiful madness out there.

Billion-dollar U.S. cannabis stocks trade on the over-the-counter (OTC) market, which is typically used only by microcap or penny stocks. Highly unusual.

Canadian stocks, like Tilray, can trade on the Nasdaq. But American cannabis companies can’t trade on the big U.S. exchanges due to federal law. Weird.

There are still barely any Wall Street analysts who cover pot stocks.

And more importantly, none of the big financial powerhouses have moved into cannabis in a serious way. Institutional investors, for the most part, cannot invest in this market. This includes wealth managers, mutual funds, exchange-traded funds, pensions, endowments and hedge funds. Their own internal rules say they can’t invest in anything that’s illegal at the federal level.

Let’s look at an example. Aurora Cannabis, one of the largest Canadian firms at a more than $7 billion market cap, has only 1.65% institutional ownership. That is low for a multibillion-dollar stock. And it’s not alone. I looked into several big, well-known cannabis companies, and the highest institutional ownership I found was 8.3%.

For comparison, the S&P 500 is 80% owned by institutions. Apple is 63% owned by institutions.

So here we have the fastest-growing industry in North America, and Wall Street doesn’t have a scrap of exposure. And most of it probably won’t be able to buy pot stocks until the U.S. legalizes marijuana at a federal level. And that’s almost certainly years away (stay tuned for Sunday’s Mailbag, where we discuss this issue).

It’s a sweet irony. Usually, big financial firms get the first crack at any rapidly growing investment through private markets. Uber, for example, is going to be a $100 billion company by the time it IPOs! The well-connected big investors are making a killing on this deal. But most haven’t even had a shot at it.

By some lucky twist of fate, cannabis is the exact opposite scenario.

Huge Growth, No Adult Supervision

The global market for legal cannabis today is roughly a $9.5 billion industry annually. Estimates put annual growth going forward from 30% to 40%. That kind of growth adds up quickly.

How big can the cannabis market be? Well, the illegal cannabis market is estimated to be $200 billion per year worldwide. Much of that $200 billion illegal market will be moving to legal channels over the next 10 years. But that’s only part of the growth picture.

Finally, people are beginning to realize that cannabis is an incredibly useful medicine. Various cannabis strains have the potential to treat dozens, probably hundreds, of medical conditions. And now that marijuana’s stigma is disappearing, more people are open to trying it, especially when it helps with a difficult medical condition. The medical side of cannabis is going to be nothing short of amazing.

And we get to invest before all the big institutions do? What? This is unheard of.

Downsides?

Of course, there are downsides to being in before the institutions.

The lack of institutional analyst coverage means we have to do all the research ourselves. That means a lot of looking at financial filings and sifting through amateur research online. Many will pick bad horses to bet on, but that’s inevitable in any market.

Institutional investors also tend to buy and hold, which helps stabilize the price of assets. Retail investors trade in and out much more frequently and tend to panic-sell. Both increase volatility.

Combined with the market’s high growth rate, this should make for some thrilling/terrifying price action over the coming years. For me, high volatility means try to buy low and hold.

Despite these inconveniences, I wouldn’t want it any other way. The marijuana market today is a rare beast. It’s a huge, fast-growing, disruptive force. And retail investors are driving the market, while most professional money is on the sidelines indefinitely.

There’s never been a market like this before. It’s going to be a wild ride for the next few years, but those who buy and hold high-quality companies should do incredibly well.

Good investing,

Adam Sharp
Co-Founder, Early Investing

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