Summary
- Several mergers have been announced over the past few days and this has driven cannabis stocks upwards.
- A newer industry is still seeing tremendous growth rates in QoQ revenues.
- Keeping an eye on the fastest growing revenue stocks may be key to increasing profits in investments.
Cannabis stocks are starting to pick up a lot of momentum in their movements. It helps that over the past few days there have been a few mergers announced within the industry such as Tilray (TLRY) and Aphria (APHA), AYR Strategies (OTCQX:AYRWF) and Liberty Health Sciences (OTCQX:LHSIF), Verano and AltMed (Both private) have agreed to merge, and Columbia Care (OTCQX:CCHWF) has agreed to pick up Green Leaf Medical. Given these high profile mergers, prices within cannabis stocks are starting to pick up a lot of steam. However, I do not think by a long shot that the mergers the industry just saw the past few days are anywhere near being done. And, that has the potential to push stocks upwards even more.
Here is a look at the recent activity in one of the ETFs, The Cannabis ETF (THCX):
I am using this ETF because it is a little more closely than the ETFMG Alternative Harvest ETF (MJ) to what the cannabis industry is actually doing. For me, I want to see pure-plays within the industry. This ETF seems to line up with pure-plays a little more than the other two more famous ETFs.
By the way, did anyone else not know that the OTC exchange itself put together a cannabis index? It’s actually almost 100% pure-play:
In both of these charts, you can see the spike upwards in early November from the election results.
Many participants believe that a Biden victory means a bright future for cannabis in the coming months and years. Until we know the results of January’s run-off in Georgia, we don’t really know the future of cannabis in America. It might be that the Senate bends to the wishes of the people. There is a lot of momentum right now for cannabis.
There is also something else going on in the cannabis industry that merits noting: Revenues are increasing within the industry. I put together a listing of the stocks I follow in a spreadsheet and look at various indicators to see the overall health of the industry. Being that I studied Macroeconomics and Statistics, I am wholly driven by data and movement.
At first, I put out a listing of about 50 stocks. Then, I added another 25 stocks. This latest list has about 112 stocks in it, however, I’ve “removed” about 8 of them because they have not reported financial information lately. No need to be talking about companies that aren’t talking about themselves.
This industry is fairly new. “As California, so goes the nation” is a famous saying. And, California first legalized cannabis in medical form back in the 1990s. There were significant limitations in procuring cannabis at first. Eventually, the industry opened up as a few states legalized medical cannabis usage.
However, it was not until Colorado legalized recreational cannabis in 2014 that the industry really took foot. Then, in October 2018, the entire country of Canada legalized cannabis on a federal level and investors went all in.
There were substantial bumps along the pathway to where we are now. The vast majority of the companies I have listed below are reporting positive QoQ earnings and an even larger majority are printing large YoY increases. Even better, companies are starting to get to the point where they are printing positive earnings per share; the end goal.
I fully expect that many more companies will merge and that may very well continue to push stocks higher. Bigger distribution networks and opportunities for economies-of-scale to be achieved will be a major driving force in this.
The Cannabis Industry
Despite the obvious advantages for two companies to get together, the other element that is happening is the continued growth in cannabis revenues overall. This, to me, is an important indicator. The industry is seeing a tremendous amount of growth overall. Data suggest that in the United States, the industry will see an increase of some 250% in the next four years. In Canada, total retail sales have increased by more than 100% for the year.
Here are the projections for the United States:
First, the chart on the United States is very likely to have to be revised upwards because the data was before the recent election. There are now more states selling recreational cannabis and that means more access by far more people. That translates into increased revenues.
I did some math on that and came up with a number of about $37.5B - $45B in four more years from the current level of about $10B.
Here is Canada's total retail sales of cannabis:
As for Canada’s data, we are in a global pandemic and retail sales have more than doubled in the past 12 months moving from C$121M in October 2019 to C$270M in October 2020. The biggest rate of gain was during the months of the lockdown. I don’t know if that portends anything downward for retail sales should the pandemic end with the recent deployment of a vaccine. That will be interesting to see.
The reason I wanted to point out the revenue increases is simple: Look at the charts above. They are increasing rapidly. If you are considering an investment in a cannabis stock, you want to ensure you are working with a company that is outpacing the industry in growth rates. Revenues would be the first place to look.
