Politics makes strange bedfellows, they say, and so it was in December 2018, when negotiators in the Senate and House reached an agreement on the Farm Bill that would eventually impact cannabis stocks.
Normally the result of a tug-of-war pitting conservative heartland agriculture interests vs. progressive coastal urbanites, and corporate farms vs. family farms, the Farm Bill legalized industrial hemp for the first time in decades, thanks to the pushing of then-Senate Majority Leader Mitch McConnell, who argued that there will be great economic benefits from legalizing the crop—and putting it under the purview of the U.S. Department of Agriculture rather than the Justice Department.
The previous Farm Bill, passed in 2014, started the trend toward legal hemp. It allowed state-regulated, university-affiliated agricultural research programs to grow hemp plants as long as they registered with the Department of Agriculture. But that bill expired in September 2018, and its renewal was held up by disagreements over SNAP (Supplemental Nutrition Assistance Program) as well as a disagreement over forestry practices—a sore spot in the wake of the California fires.
The 2018 Farm Bill was big; it governs the distribution of $867 billion over a five-year period, ending in 2023, through a wide variety of food and agriculture programs.
To my mind—which admittedly has a bias toward free markets—hemp farmers didn’t need help; they just needed their product to be legalized so they could give the market what it wants.
And right now, what the market wants is hemp to make cannabidiol, otherwise known as CBD. The oil was already produced in many states by small producers—including Mitch McConnell’s Kentucky—but they only managed it by doing an end-run around federal prohibition, which limited interstate trade and transport of hemp products.
Since the Farm Bill passed with hemp legalization intact, it has kicked off a boom in the CBD industry and in turn, cannabis stocks. And it’s not just CBD. Spurred by the Farm Bill and the quickly spreading legalization of marijuana in states around the country—18 states now allow recreational use for adults, 38 have legalized medicinal use—U.S. retail sales have exploded the last couple years, hitting a record $25 billion in 2021 with expectations that 2022 sales could hit $33 billion.
Cannabis Sales Up … But Not Cannabis Stocks
Given the rapidly accelerating sales and seemingly inevitable trend toward widespread legalization, you’d assume cannabis stocks would have exploded in the three and a half years since the Farm Bill passed … right? Wrong. In fact, shortly after the bill passed, cannabis stocks nosedived, losing more than 80% of their value in the ensuing 15 months, bottoming in March 2020 along with everything else at the outset of the pandemic. After rebounding with the broader market, the sector topped out in February of 2021 and has since fallen even further.
The roller-coaster nature of cannabis stocks the last few years has made for a difficult investing environment. But there have been some bright spots. Here are some of the biggest movers in the past year.
Canopy Growth (CGC) is valued at $3 billion, thanks to heavy institutional sponsorship. It’s not the fastest grower in the industry anymore, but it is a powerhouse. Constellation Brands (STZ) is a major shareholder, and Martha Stewart, who originally put her name on the company’s CBD gummies, is the company’s official strategic advisor. Also, Canopy owns a chunk of TerrAscend, which is designed to pave the company’s entry into the U.S. market, and it has a deal to acquire privately held Acreage Holdings when marijuana becomes fully legal in the U.S. As for the stock, it’s trading at levels not seen since the passage of the Farm Bill. Given the company’s size and institutional sponsorship, a turnaround in the sector will bode well for shares.
Chicago-based Cresco Labs (CRLBF) has long focused on the wholesale side of the business, a strategy prioritizing volume over margins. But with the acquisition of Columbia Care (CCHWF), (still in process), the company is getting a strong retail network to balance its wholesale business. Theoretically, the acquisition could make Cresco the industry leader by revenue, but practically, it looks like the required divestments in Florida, Illinois, Massachusetts, New York and Ohio (and possibly more) will make that unlikely. Still, the company looks great from a fundamental perspective. And its stock remains the sector’s cheapest on a price to sales basis—just 1.6.
Trulieve (TCNNF) has long been the biggest seller of marijuana in Florida, where it has a 46% market share, Trulieve has been expanding across the country in the past year (it had seven acquisitions in 2021), with the October acquisition of Harvest Health & Recreation being the big one. And just today it announced the closing of the acquisition of Greenhouse Wellness West Virginia Dispensaries, which holds a dispensary permit in Martinsburg. Trulieve currently operates medical dispensaries in Morgantown and Weston, and holds seven other permits in the state, so the company will be a major presence in West Virginia for years to come. And that makes sense because it borders Pennsylvania, which is Trulieve’s Northeast hub (Florida is the Southeast hub and Arizona the Southwest hub). The company now has 163 dispensaries in 11 states (including 113 in Florida), but it has none yet in New York or New Jersey, two states that will be important markets going forward. And maybe that’s what’s worrying investors here. In any case, the stock has now broken down below its March low, so a downtrend remains in effect.
Best Cannabis Stocks to Buy
So what are the best investments in the sector?
I’ve been writing about the companies growing and selling both hemp-based CBD and marijuana since early 2017 in Cabot SX Cannabis Advisor, and I’m going to keep on writing about them, as the cannabis industry as a whole has the potential to become a $3 trillion industry by 2030.
Today, my recommended portfolio holds 8 stocks and is well-diversified, with stocks both in Canada and the U.S., both in marijuana and hemp, and both in production and retail. With many cannabis stocks moving as much as 10% some days, you need diversification to smooth out the bumps. But a lot of the bumps are upward because these businesses are growing fast!
You also need specific expert guidance on how to invest in marijuana stocks, which is what I give my readers in every issue and every update.
For more information, click here.
Do you own any cannabis stocks in your portfolio?
Timothy Lutts heads one of America’s most respected independent investment advisory services. Each week, Tim personally picks the single best stock in his exclusive Cabot Stock of the Week advisory. Build your wealth and reduce your risk with the top stock each week for current market conditionsLearn More
*This post has been updated from an original version, published in 2018.