21. Sep 2022
It is undisputed that the use of cannabis has gained momentum across the globe. According to Grandview Research, the global market size for the cannabis industry will reach $102.2 billion by 2030. But is the grass getting greener for investors?
In the U.S. alone, it is estimated that the cannabis industry will hit $32 billion in annual sales by the end of the year. However, although cannabis consumption is growing at a fast pace, it is still illegal at the federal level. Nevertheless, the rapid expansion of business has led to the impressive growth of U.S. based cannabis companies.
19 US states have legalised the usage of marijuana for recreational purposes to date. Meanwhile, the medical use of cannabis has been granted with a doctor's recommendation in 37 states.
The cannabis industry might still be in its early stages, but the market opportunities are enormous, especially as more U.S. states legalize marijuana use.
Big corporations have already recognised lucrative business opportunities in this sector and have started to invest their money.
Previously I have mentioned Altria Group, that took a 45% stake in Canadian cannabis grower Cronos Group. But there are also other examples, such as the $4 billion investment of Constellation Brands (an alcohol producer) into Canopy Growth Corporation.
Even The Scotts Miracle-Gro, a U.S. manufacturer and marketer of branded garden and plant care products, made a big entrance into the medical marijuana market when the company acquired Etain Health, one of New York state's original medical marijuana producers.
So how can private investors join the party?
There are numerous ways to invest in cannabis, from direct stock investments, to various ETFs that will allow you to spread your investment among companies across the entire marijuana industry.
Keep in mind that each of these stocks and ETFs have their best entry and exit points during the year, which can be easily identified using seasonal charts.
Seasonal Chart of The Scotts Miracle-Gro Company over the past 10 years
Keep in mind that a seasonal chart depicts the average price pattern of a stock in the course of a calendar year, calculated over several years (unlike a standard price chart that simply shows stock prices over a specific time period). The horizontal axis depicts the time of the year, while the vertical axis shows the level of the seasonal pattern (indexed to 100).
From the chart above, it is clearly visible that the end of September until mid-January, over the past 10 years, have been favourable months for The Scotts Miracle-Gro. In this time span of 76 trading days (from September 23 until January 11), shares rose on average by 11.84%. Moreover, since 2012 the pattern returns had a winning strike of 90%, meaning that The Scotts Miracle-Gro generated gains in 9 out of 10 years during the selected time period.
Is the grass getting greener?
The cannabis industry ranges from weed-infused drinks, to companies that own marijuana farms and actively cultivate the plant. There are also many manufacturers that provide ancillary support to the industry and are involved in cannabis extraction, product preparation, packaging, and labelling. In addition, pharmaceuticals use biotech to derive drugs from cannabis, planting and selling them to a wider audience.
A leading company in cannabinoid science is Jazz Pharmaceuticals, which had a strong seasonal period between March and July over the last 10 years. Also, in 2022 this pharma giant posted a small gain.
Seasonal Chart of Jazz Pharmaceuticals over the past 10 years
There are other companies that are providing cannabis-related properties through Real Estate Investment Trusts, as Innovative Industrial Properties that invest in greenhouses and industrial facilities for the medical cannabis industry. There is a broad portfolio that you might choose from.
However, if you consider investing directly into a cannabis-related business, or in the companies that have dedicated one part of their businesses into this sector, you have to be aware of the potential risks. These risks range from regulatory issues to low transparency.
Most companies active in this industry represent so called small caps, that remain OTC-traded accompanied by low market liquidity. OTC-traded companies are also not required to file financial statements regularly, which would normally be an investors first point of valuation.
Moreover, Canada provides an interesting counter point. Unlike the market in the U.S where cannabis is still illegal in several states, Canada has legalized the plant nationwide. This has led to the market slowing, due to higher supply over demand and decreasing cannabis prices.
Marijuana investing isn't for everyone, especially for retail investors who prefer to minimize risk. Therefore, if looking to invest in the cannabis sector, do your research first and time your investments wisely.
To help in deciding where and when to invest, make sure to use Seasonality Screener. By signing up for free to https://app.seasonax.com/signup, you will be able to identify the best entry and exit points for more than 25.000+ instruments, including stocks, (crypto)currencies, commodities, and indexes.
Remember, don’t just trade it, Seasonax it!
Co-Founder and Managing Partner of Seasonax