THE CANNABIS MARKET – DISASTER OR OPPORTUNITY?
ARE WE AT THE BOTTOM?
?THE BAD AND THE GOOD
We live in times of heightened economic volatility, mainly caused by supply chain imbalances, a relic of the two-year pandemic, resulting in a high inflation rate that has risen to 8% in 2022. Accordingly, most pieces of financial assets have declined from their 2021 highs. The S&P is down more than 14%, and the NASDAQ is down 22%. Many cannabis stocks, especially those of the highly hyped and often severely overextended SPACs, have declined, several more than 50%.
In recent years, the cannabis industry has gone through an unprecedented growth (investment) phase, quickly followed by a significant drop in raw material (flower) prices. While an oversupply of products, either from legal production or illicit sales, still increased revenues for some producers, especially for the large SPACs and MSOs, profits shrunk drastically, resulting in decreasing share prices. Some states have seen a dip in sales between 4% and t 10% while still setting sales records. An increasing number of cultivators have abandoned or are not renewing their expensive licenses, overextended retailers and distributors shut down, and "For Sale" signs are going up on manufacturing facilities throughout the Country. At least four National cannabis companies have either departed California (the biggest market in the U.S.), are planning to reduce the size of their operations significantly or shut down altogether. While this has created concern in financial circles, this might also represent a unique opportunity for investors to increase their position in a renewed cannabis market, especially in California.
This weeding out of poorly managed over extended companies should lead to a financially healthier and more sustainable market sector. Companies that have a realistic and well-managed business model and structure most likely have the staying power to work through these challenging times. We see the rules and regulations (and related expenses) coming into sync with the market conditions and improving to the degree that will make the U.S. cannabis markets very profitable, especially in California, which is still the largest consumer market in the U.S.
Note: One week ago, our entire portfolio was down 63% compared to 55% by the end of October
THE REASONS
Overproduction of flower, based on hyped and unrealistic expectations (Grow it, and they will come)
Flower prices droped by a factor of 6-8 times, making it hard for mass producers of low-quality flower to generate profits
Legalization has still not improved conditions for small to mid-size manufacturers
Illicit market sales are still 6x as big as legitimate sales, driving flower prices down.
The permitting process is complicated, lengthy, and very costly
Taxation on the cultivation and retail level is too high
Accounting principles are unrealistic, not allowing general GAP business expenses to be applied.
These factors make it nearly impossible for most companies to generate profits. Decreasing share prices are the direct result. See the pain producers have been going through since January of this year, month by month.
CHANGES COMING
All of this is going to change soon enough. We are going out on a limb, something we typically do not do. We project that the monthly growth of our portfolio of 25%, as experienced from September to October, will continue at a somewhat lower rate of around 15% per month as the entire sector is recovering. That is, if the Feds make our (investment) lives just a little easier before this year is over. Based on the typical chart support and resistance levels, we may have found a bottom at the end of October. We may not consider a one-month turnaround a "trend" yet, but the famous saying "The Trend is your Friend" may apply in this case; however, small the trend at this time.
MARKET DEVELOPMENT
The cannabis sector has developed from a revolutionary new industry ready for the taking by anybody willing to try into a sophisticated and complex marketplace that requires solid business experience and a capable management team. As the industry evolves, it has become vital for brands and retailers to know their customers, how they are evolving, and what products are in high demand. Companies have identified distinct consumer archetypes based on social and demographic data analysis and consumer behaviors and purchasing habits to understand the ever-changing consumer better. The companies that can dynamically adjust to these market conditions and produce high-quality and unique products will be the winners and generate profits and a good return on investment for their investors. Interestingly, all companies in our portfolio have moved in concert and the same direction, regardless of up or down, with a few companies suffering smaller decreases in share prices than others.
THE GOOD NEWS
Medical cannabis is now legal in 37 U.S. states.
Nine additional states are most likely to pass recreational legislation.
Weed sales increased by 40% and reached $25 Billion in 2021.
Sales are expected to reach $32 Billion in 2022 and $100 Billion by 2030.
The cannabis sales tax revenue across states increased 34% from 2020, totaling more than $3,7 Billion.
The U.S. legal cannabis market is projected to more than double by 2025, reaching $41.5 billion in sales and producing a 21% compound annual growth rate ("CAGR").
Mergers and acquisitions of MSOs nearly doubled from 2020 to 2021. T.T.
The cannabis industry supports 428,059 jobs.
Ninety-one (91%) of U.S. adults are on board with marijuana legalization, with California being the leading producer and consumer. Recreational use is legal in 18 U.S. States.
48% of Republicans and 83% of Democrats favor legalizing marijuana.
Seventy-two (72%) Americans now live in a state with access to legal recreational cannabis.
50% of cannabis consumers have been consuming more cannabis since the start of the pandemic.
Note: Statistics according to Gallup, MJ Business Daily, Pew Research Center
This is an explicit confirmation that cannabis is here to stay and that the market will continue to expand with continuing legalization, reduced taxation, diminishing illicit sales, and stabilizing consumer prices.
HAVE WE REACHED THE BOTTOM?
Analyst wisdom says," It's always tricky to call the Bottom." Nevertheless, many investors always try to do just that. There are certainly enough newsletters out there telling you with absolute certainty to buy this "100-Bagger"; success is guaranteed. Success is also often "proven" by the person who "called the crash in …. and the enormous rise in ……." This person is the guarantee that you will multiply your money quickly and without risk.
At Stockwatchindex (SWI), we have never been that kind of financial newsletter. We do not give investment advice; we provide the facts and the numbers based on our in-depth research. Sometimes we go as far as providing an opinion. You must decide for yourself if the information we provide represents an excellent investment opportunity and is in sync with your investment philosophy and risk tolerance.
For this presentation, we have focused on the hot/cold/hot marijuana sector, which is the focus of a significant section in our SWI Newsletter, SWI Daily paper, and consulting work. We have been tracking the sector very closely for the past four years, have worked very closely with several cannabis companies, and have paid particular attention to the reasons why the cannabis investments during the last year have delivered a less than exciting return on investments at least until September 2022.
CONCLUSION
While we do not pretend that we are absolutely sure that this is THE BOTTOM, we let the numbers speak for themselves. Nevertheless, if we can trust chart interpretations, we may be nearly there or already on the way back up. Naturally, it is as vital as ever that you pick the right company; that criterion has not changed.
Note: We have a consulting relationship with Livewire Ergogenics, Inc. (OTC: LVVV)
www.stockwatchindex.com
New U.S. Cannabis Council advocates for federal legalization
Several top cannabis businesses, associations, and advocacy organizations joined to create the U.S. Cannabis Council (USCC). The council's mission is to "align and unify its member's collective voices to advance cannabis reform" and "focus on securing federal reforms that advance social equity and promote fair, safe and well-regulated markets nationwide as states continue legalizing cannabis at a rapid rate."
MARKET AWARENESS
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