In recent years the cannabis industry has exploded through a boom and bust. Now, investors are wondering if it is time to buy undervalued marijuana stocks. With a recession on the cards, marijuana use may go up, but does that mean undervalued cannabis stocks are ripe for the picking? Read on to find out.
Marijuana is a Booming Business
The cannabis plant boasts many medicinal qualities. Thus, investors have welcomed the chance to invest in this promising industry.
From mental health to pain relief, marijuana R&D has brought forth an array of products with the potential to cure and alleviate all manner of symptoms.
In 2018, the marijuana industry was thriving, with predictions that it could reach $57bn worldwide by 2027 and interest in marijuana stocks soared.
Last year the US cannabis industry hit a record $24bn in sales, and now expected annual sales of $70bn are projected for 2026, although projections vary by source.
There are many reasons cannabis stocks go in and out of favor. Ultimately, the business is still in its infancy, and until widespread legalization occurs, we can expect stock volatility to continue.
Legal Hurdles Cause Stock Volatility
Furthermore, the black market for marijuana is still thriving, and that's unlikely to change until cannabis is more readily available and legal throughout all states.
Every so often, lawmakers will intimate that changes are coming, triggering a flurry of interest in cannabis stocks, but these past eighteen months haven't been as fruitful as voters expected.
The Biden administration was expected to make sweeping changes to cannabis legislation, but so far, the changes have flown under the radar. The legalization process is highly politicized; thus, election years tend to see a burst in legalization policies, laws and interests.
As 2022 is a mid-term year for a presidential party that lobbied for marijuana legalization, many see a bounce in marijuana stocks ahead.
SAFE Banking
Indeed, in August, Senator Cory Booker hinted that a compromise on marijuana legislation might be in the offing relating to marijuana business banking and criminal justice reform. The banking system is currently unable to loan to cannabis businesses or offer them banking facilities, making business administration difficult for them.
The Secure and Fair Enforcement (SAFE) Banking Act has proposed legislation regarding the disposition of funds gained through the cannabis industry in the United States.
Booker said he is open to a "SAFE Banking Plus" bill with provisions for marijuana business banking, criminal justice reform and compromise legislation that should include measures to provide Small Business Administration loans to small businesses.
The SAFE Banking Act has passed many times in the House but has been delayed in the Senate. But the legislation would allow legal cannabis enterprises to conduct business with the US financial system.
Cannabis stocks responded positively to this news with a bump across the sector. However, this talk has subsided as inflation, and recession fears now take center stage.
Nevertheless, marijuana use is undoubtedly growing, and a more accepting attitude with it.
Potential Wonder Drug
Although the drug is believed to be beneficial in treating many minor and potentially more serious ailments, there remains a lot to consider.
Recent studies have shown legalization of cannabis by US states could be detrimental to pharmaceutical firms, losing them billions of dollars. That's because legalization is likely to increase the use of cannabis as an alternative to conventional pharmaceutical drugs.
It's well known that big pharma has a lot of money and sway over US political policies. Therefore, their resistance to legalizing the marijuana industry will likely slow the legalization process down.
Factors to Consider in Marijuana Investment
It's not just the fact cannabis can treat multiple health conditions that makes the drug such an enticing investment. For decades the tobacco and alcohol industries made shareholders a lot of money. Thus, speculative investors believe that marijuana stocks stand to do the same.
But not everyone agrees, and the industry still has opposition.
California became the first state to allow medicinal cannabis use when voters passed the Compassionate Use Act in 1996. Today, cannabis is legal for medicinal and adult (recreational) use in California. Yet, according to a McKinsey study, 24.7% of the population of California perceive significant risk from marijuana use, which is higher than the US average of 20.9%.
Cannabis is often considered a drug that leads youngsters to try harder drugs. But this attitude is rapidly changing as multiple breakthroughs show its potential to help rather than harm. While moderate alcohol use is thought to have medicinal benefits, these pale in comparison to the potential for cannabis.
Delta-9 THC and CBD are categorized as significant cannabinoids due to high concentration levels of cannabis. However, according to the National Library of Medicine, scientists have discovered more than 120 minor cannabinoids in the plant's genetic makeup, and there could be more. If these can be extracted, they could also prove effective in treating a wider array of ailments.
Along with the actual cannabis plant, the industry has spawned many more investable ideas.
For instance, digital therapeutics have come on in leaps and bounds over the past decade. In 2017, the FDA approved a mobile application to help treat alcohol, marijuana, and cocaine addiction, citing clinical trials that showed 40% of patients using the app abstained for three months, compared with 17.6% of those who used standard therapy alone.
Marijuana Stocks to Watch
Marijuana stocks are focused on various aspects of the cannabis industry, from medical cannabis research to the cultivation, processing, and distribution of cannabis products worldwide.
Target consumer groups in the regulated business include wholesale, pharmacy, government, and direct-to-patient. At the same time, cannabinoid (CBD) and hemp products in the unregulated business are sold to retail, wholesale and direct to consumers.
Furthermore, the potential for legalization to occur in other parts of the world is also driving North American cannabis companies to invest abroad.
Some of the potentially undervalued marijuana stocks in the North American space include:
Canopy Growth (NASDAQ: CGC) (TSE: WEED)
Tilray Brands (NASDAQ: TLRY)
Cronos Group (NASDAQ: CRON) (TSE: CRON)
SNDL (NASDAQ: SNDL)
Aurora Cannabis (NASDAQ: ACB) (TSE: ACB)
OrganiGram Holdings (NASDAQ: OGI) (TSE: OGI)
Hexo (NASDAQ: HEXO)
Verano Holdings (OTCMKTS: VRNOF) (CNSX: VRNO)
Cresco Labs (CNSX: CL)
Curaleaf Holdings (OTCMKTS: CURLF) (CNSX: CURA)
GrowGeneration (NASDAQ: GRWG)
High Tide (NASDAQ: HITI) (CVE: HITI)
Green Thumb Industries (OTCMKTS: GTBIF) (CNSX: GTII)
Are there Undervalued Cannabis Stocks?
Marijuana stocks remain a speculative investment subject to extreme volatility. Although the mid-term year could provide opportunities for short-term spikes in marijuana stock prices, there are no guarantees this will be sustained.
Price-to-book value (P/BV) is one metric to consider when looking for undervalued cannabis stocks. This assumes the total market capitalization of a company versus its assets.
A P/BV of less than 1 could mean the stock is undervalued.
Of the stocks listed above, the following have a P/BV of less than 1 today.
Canopy Growth
Tilray Brands
Cronos Group
SNDL
OrganiGram Holdings
High Tide
Hexo
As several of these marijuana stocks have a P/BV under 1, this could suggest there are undervalued cannabis stocks out there. However, they're all in the same boat, and the competitive nature of the industry means it's likely only the strong will survive.
M&A activity is common in an economic downturn and even more so in a speculative space such as the cannabis industry.
If a cannabis company is acquired, it could provide a short-term rally in the acquirer's share price or the target stock. But inflation is weighing heavily on all industries, and marijuana stocks are not immune. Higher input costs could crush margins, leading to share price drops and even bankruptcy.
For speculative investors with a lengthy time horizon, undervalued cannabis stocks may seem as good a place as any to park their cash. Alternatively, traders may be looking to trade the volatility in marijuana stocks exacerbated by political debate.