The Opportunity (And Pitfalls) Of Cannabis Stocks...

Amber Hestla's picture

Tuesday, October 29, 2019 - 12:00am

by Amber Hestla

As you may know, I've spent a fair amount of time recently talking about investing in marijuana stocks. This may sound curious, since my background is in trading. But marijuana is a great market. It's a product with a long history of demand. And that demand is increasing as the supply structure is changing.

That's a great opportunity for traders and investors alike.


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How Cannabis Is Changing

For decades, marijuana has been illegal. It's been widely distributed and readily available, but it was often only available as dried leaves. Availability in other forms is one of the most exciting changes in the market right now.

Researchers have long known that there are hundreds of different compounds in the cannabis plant. In recent years they have learned to isolate some of these compounds to produce specific pharmaceutical and other beneficial effects.

This is one of the changes in market structure...  the fact that marijuana is no longer a single commodity. It includes CBD oils and cremes along with other products that are attractive to different consumers.

The more important change in market structure is the legalization for medical and recreational purposes in many states and countries. This increases the availability of these new products. 

If you've ever done field research at a retail location like I have, you'll see young and old lined up to buy their favorite products. Retail stores also have experts who explain new product offerings, and excited users are spending more and more in pursuit of real benefits.

But there is a problem in the industry. The old, illegal market structure continues to exist alongside the new, legal structure.

The Challenges

In one large city I visited recently, I saw a sign for a legal marijuana store. And right outside, I saw a few people loitering. Years ago, I worked in law enforcement, so I quickly realized the loiterers were selling illegal drugs. 

Longing for a brief return to the excitement of my previous career, I decided to try to make a deal. When I approached the young man, he offered me "half-price weed" and explained his product was better than what the store offered at half the price. He even offered to smoke a free sample with me.

I declined his offer but realized this is a significant problem for the industry.

A study in Canada showed that the average price of legal cannabis is about $7.70 per gram while illegal cannabis is available for an average of about $5.60 a gram.

This is about a 27% discount. And that discount is unlikely to go away. In Colorado, the state collects taxes of at least 32.9% on legal marijuana, a cost that consumers in the illegal market avoid paying.

This is one of the reasons stocks in the sector have suffered a 25% decline over the past four months. The chart below shows my Marijuana Index, an index based on the US-listed marijuana stocks.

Marijuana Index

This chart shows the reality of trading the marijuana sector. This is not a buy-and-hold investment. There will be ups and downs as the industry faces the challenges of regulation and competition in the existing illegal market.

Why You Should Trade Cannabis Stocks

The ups and downs are tradable. In fact, short-term trading will lead to opportunities like the triple-digit gain my subscribers enjoyed in Schweitzer-Mauduit International, Inc. (NYSE: SWM)

This company makes the rolling papers used by marijuana consumers. And thanks to my targeted "turbo" trading strategy, we were able to walk away with a gain of 130.5% in a matter of weeks...

The point is, it takes some effort to determine which companies involved in the industry are worth an investment. But in the long run, my research tells me this industry will be among the biggest winners of the next 20 years. National legalization will help reduce illegal trafficking and states will soon realize that taxes must be reasonable. These efforts will boost legal sales.

As the process unfolds, there will be winners and losers. Traders who use strategies like the one that helped us bag our gain with SWM will be among the biggest winners as the turmoil continues. 

So stay tuned. I plan on covering this space as the industry evolves -- and I'll even share some tips on how to profit. 

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Amber Hestla does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.