Chaka Ferguson, managing editor, Palm Beach Daily
The cannabis market is like the Wild West right now.
Companies are navigating rules and regulations… Industry leaders are underperforming lofty revenue and earnings expectations… And the vaping “crisis” has scared investors.
So across the board, cannabis stocks have taken a beating. For instance, the ETFMG Alternative Harvest ETF (MJ) tracks 37 cannabis stocks. And it’s down over 30% on the year.
Despite this negative news, we’re still bullish on the space.
Now, that may be an unpopular idea. But as Daily editor Teeka Tiwari says, “If you want to crush the market averages, you need to look at ideas other investors have dismissed.”
And right now, investors are leaving cannabis for dead.
But as I’ll show you today, the cannabis space is at the beginning of a massive, multi-decade run…
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Taming the Wild West
Like any new space, there’s a hodgepodge of laws regulating cannabis in the U.S.
And although 33 states have approved medical or recreational marijuana (one form of cannabis), it remains illegal at the federal level.
But hemp is another form of cannabis that’s already legal across the country.
Still, some financial institutions have excluded hemp businesses because they’re associated with marijuana. Yet that’s changing.
Recently, several federal agencies – including the Federal Reserve, FDIC, and the Financial Crimes Enforcement Network – clarified the situation.
In a statement, the agencies said banks should treat hemp businesses as normal customers since hemp is federally legal.
This is huge news…
Three major regulatory agencies just gave banks the green light to accept legal cannabis businesses. It’ll turn on the spigot of institutional money.
And Congress is getting its act together, too…
In September, the House passed the SAFE (Secure and Fair Enforcement) Banking Act. It would prevent the federal government from applying sanctions to banks working with cannabis businesses. And it would allow financial institutions to invest in U.S. pot companies without breaking federal law.
Now, the act still needs to pass the Senate. But even if it faces roadblocks there, the best days are still ahead for legal cannabis…
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The Genie Is Out of the Bottle
On December 1, legal cannabis sales began in Michigan. And on January 1, they’ll begin in Illinois.
So in the span of a month, the 10th and sixth largest U.S. states by population will join nine others that allow legal recreational cannabis.
Analysts estimate Michigan will add $600 million in annual sales to the recreational cannabis market. And Illinois has the potential of reaching $4 billion in annual sales.
According to Grand View Research, U.S. legal cannabis sales in 2018 were $11.9 billion. So these two states alone could grow this market by almost 40%.
And that doesn’t account for the world’s largest market for legal recreational cannabis: Mexico.
Last year, Mexico’s Supreme Court ruled the country’s ban on recreational cannabis was unconstitutional. And it set an April 2020 deadline to establish rules for the industry.
So next year, the world’s 15th largest economy and 11th largest country by population will open its doors to recreational marijuana.
That’s a huge tailwind for the industry. And this is just the tip of the iceberg…
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Small Piece of the Pie
Recreational cannabis is just a small slice of the cannabis market.
You see, hemp alone has about 50,000 industrial uses. You can use it to make clothes, paper, and biodegradable plastics. So we’ll see a lot of hemp and its active ingredient, cannabidiol (CBD), added to thousands of products.
Clinical studies have already proven CBD can treat childhood epilepsy. And it can serve as a natural wellness remedy for pain, inflammation, anxiety, and a whole lot more, too.
According to New Frontier Data, the global total addressable cannabis market (regulated and illicit) is $344 billion.
And Merrill Lynch estimates that hemp-based products alone will disrupt $2.6 trillion worth of industries in the next few years. That’s larger than the alcohol ($1.3 trillion), tobacco ($900 billion), and nutraceuticals ($231 billion) markets… combined.
Look, legal cannabis is an undeniable trend with massive runway for growth. But it’s an extremely volatile segment of the market…
So how do you play it? I turned to Teeka for the answer, and here’s what he said:
Hear me out when I say you must view these sell-offs as an opportunity to buy well-curated cannabis companies. Just remember to be rational in your position-sizing: up to $400 for smaller accounts or $500–1,000 for larger accounts.
Like all high-growth sectors, the cannabis space will be volatile for years. You’ll want to make sure you can sleep well at night by not risking any more than you can afford to lose. As long as you’re positioned rationally, you can safely ignore the volatility and rely on the strength of the long-term trend of cannabis usage – which is firmly higher.