Cannabis Investing 1: Investment Opportunity of the Century?
Updated: May 5
The title of this page is intentionally a question, rather than a statement. Rather than provide my opinion, my approach with this site is to focus on the data and numbers, with which you can make your own data-driven decisions.
As a teenager I read a book on the mafia based in the prohibition era. It was fascinating to read about the rise and fall of Al Capone and other gangsters during the prohibition of alcohol from 1920 to 1933. Drama and entertainment aside, one question I kept asking was: why was alcohol prohibited in the first place? Nothing good came from the prohibition of alcohol. It only led to the rise of organized crime and a thriving illicit market, which avoided paying taxes while simultaneously jeopardized public health without regulations in the products sold.
After the prohibition fiasco was ended in 1933, we saw the rise of the legal alcohol industry throughout the 20th century. Today we have alcoholic beverage companies with US$80 Billion plus market cap, including Diageo PLC (NYSE: DEO) and Anheuser-Busch InBev (NYSE: BUD), in addition to US$40 Billion plus market cap companies like Constellation Brands (NYSE: STZ), Heineken and Pernod Ricard. Just these 5 companies have a combined market cap of well over US$300 Billion.
More than a century has passed since the 1920 policy error that resulted in crime, harm and death to the public, an increase in expenses for law enforcement and a loss in tax revenue that could have been used for the good of the American people. Today we see history being repeated, this time for Cannabis, a miracle plant whose benefits to physical, mental and spiritual wellbeing have led to growing consumption in medical cannabis, in addition to recreational cannabis. As a (self-proclaimed) champion for plant medicine, I view the prohibition of Cannabis as one of the worst errors of the 20th century and a great disservice to humanity. Hope did arrive when the Democrats led by Joe Biden and Chuck Schumer came into power promising Cannabis decriminalization and progress on legalization. But their lack of execution on these promises so far, even with many Republicans now supporting progress, has led to disappointment across those who work in and support the growing cannabis industry, either as employees, customers or investors.
Cannabis is a medicinal plant known for millennia to indigenous cultures. In my view it is a gift from mother nature to alleviate the physical and mental suffering of the world. The once in a century Covid-19 pandemic has increased the stress and suffering of humans across the globe, and worsened the mental health crisis. In addition, the prevalent use of addictive opioids (over cannabis-based alternatives) in pain management, etc have led to an opioid crises and unnecessary deaths across the world.
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All data points to an increase in Cannabis consumption in Canada and the US. Many consumers have decreased (or eliminated) alcohol consumption and switched to cannabis, as have I as I explain in my About Adastra page. Important data points to note are the high and increasing number of US adults supporting Cannabis legalization. A study by Pew Research Center states that 91% of US Adults support Cannabis legalization. This includes 60% support for medical and recreational use legalization and 31% for medical use only. In addition, studies by the reputed Gallup Inc to the question “Do you think the use of marijuana should be legal, or not?” shows the rise of “Yes” from 12% in 1969 to a record 68% in 2021.
The legal Cannabis market has risen rapidly ever since Canada legalized Cannabis in 2018. Throughout prohibition, Cannabis has been easily available in many parts of North America through a thriving illicit market. Two years post legalization, in Q3 2020, the legal cannabis sales in Canada overtook illicit sales for the first time. For further reading I recommend the report Canada’s legal cannabis market continues to erode illicit market’s share published by one of the great sources of cannabis industry news and analysis, MJBizDaily.com using Statistics Canada data.
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I view the Canadian Cannabis market as the pilot market, and the US Cannabis market as the real deal, given that the US has approximately 9X the population. Further growth in Cannabis will come from legalization in Germany and other countries around the world.
Statistics Canada is a great source of data that can be used to analyze the, now mature, Canadian Cannabis market. A report showing legal Cannabis retail sales from Oct 2018 (start of legalization) till the last available month at the time of this blog’s launch is available at this Statistics Canada link. This data can be extrapolated to the still rapidly growing US Cannabis market.
Annualizing the monthly sales puts annual legal Cannabis retail sales at C$4.3 Billion (approx. US$3.5 Billion). Consumption is growing but being offset by a decrease in prices. But the legal cannabis market will likely continue to grow as more people transition from alcohol to cannabis consumption, and the legal market continues to capture share from the illicit market, which is still probably around C$3 Billion/annum. If we add medical cannabis sales, the Canadian Cannabis market is approximately C$5 Billion, with potential to grow to C$8 Billion with legal market share growing, or even higher long term if we see cannabis infused beverages taking market share from alcoholic beverages.
When it comes to data, my preference is to focus on the big picture and not miss the forest for the trees. The overall trend is an increase in the legal cannabis market size globally, as more states (within the US) and countries (like Germany) legalize cannabis for medical and recreational use. Extrapolating for population, the US market size I see from multiple sources is consistent with Canada, with further growth as more states legalize and the legal share of the market continues to grow as the illicit share falls.
CNBC, in the video below, estimates the US legal Cannabis market size for 2022 at US$ 31 Billion.
It is not easy to estimate the size of the illicit US market. But given where the US is with number of states still to legalize and federal legalization still in the works, I would estimate the illicit Cannabis market at US$ 60 Billion and the total market at US$ 90 Billion. The legal market may take another few years to overtake the illicit market, depending on progress on legalization. And also, similar to Canada, the increase in consumption will be partially offset with decreases in prices. But my estimate, for the purpose of this blog is that the US legal cannabis market will be at around US$ 50 Billion in 2025, and potentially US$ 75 Billion by 2030.
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One additional point to note is that most people associate cannabis with tetrahydrocannabinol (THC), the main psychoactive compound in the cannabis plant. But this is just one of more than a hundred compounds, called cannabinoids, found in the miracle plant. Research on the health benefits of cannabinoids is on the rise, as is consumption of cannabinoids including cannabidiol (CBD), cannabinol (CBN), cannabichromene (CBC) and cannabigerol (CBG). The global CBD market (including CBD products for the pet industry) is already in the billions of dollars and the trends indicate it can grow to tens of billions by around 2025. Dog and Cat CBD treats are gaining in popularity and several CBD companies have launched pet products.
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CBD oils and capsules are the primary ways in which I consume cannabis. This blog has several affiliate links to nonpsychoactive cannabinoids, with the goal of spreading awareness and monetizing this blog’s content. Feel free to check them out as part of your research. You might find something that helps improve your physical, mental and/or spiritual wellness; and you would be supporting my research in the process.
In essence, what is the narrative behind all these numbers? The Cannabis industry is experiencing impressive growth, that will only increase as more countries and states legalize. These numbers may seem high but I believe they are realistic. We are starting to see rising sales for cannabis infused edibles (gummies, chocolates, etc) and beverages. While currently, lots of focus is on cannabis products being smoked, we are seeing growing consumption in beverages and edibles. If the trends continue, with some help from legislation, we could see cannabis infused beverages becoming as popular as beer. The real threat to the alcohol sector has not yet begun.
Wow, what an amazing opportunity, investors must have done really well in cannabis stocks, right? Once again, let the numbers do the talking. The data indicates that the Cannabis sector has been one of the most disappointing sectors for long term investors. This is the topic of the next article in this category: Cannabis Investing 2: Caveat Emptor.
When it comes to investing in the stock market, my view is that an analysis of the sector must precede an analysis of individual stocks or ETFs. This first article was written to give an overview of the Cannabis sector, with growth trends and market size. The second covers risks and mistakes made by companies, governments and investors in the past. The series of articles in the INVESTING category gives a foundation on investing in the cannabis sector. These then lead to several pages with analysis in the ANALYSIS category and investment thesis pages for selected companies in the STOCKS category.
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Disclosure: I (username Adastra) am an investor not a trader. I am bullish on the Cannabis sector as a long-term investment (2025 and beyond), provided stocks/ETFs are carefully picked based on data-driven due diligence. Of the 15 stocks covered in the Best Cannabis Stocks analysis, I own only High Tide, which I am holding as a long-term investment. But my analysis indicates (without any guarantees) that there is a potential for impressive gains in investing in the stocks best ranked in the analysis, including WM Technology, Trulieve, Curaleaf and any other stocks that will have a dedicated page. I reserve the right to buy or sell at any time any of the stocks mentioned in this blog. I do not short stocks and never will short any stock in a company that makes the world a better place. I do not have insider knowledge of any company covered in this blog. All data used for analysis is from public sources. I have received (as of last update date of this page) ZERO funding for this blog from any of the companies featured in this blog.