This year will not be like 2020.

The fear of a new era of higher inflation is dominating headlines… But it’s also creating opportunities.

For example, the last three weeks were a point of weakness for the Nasdaq, as it fell more than 10% from its highs. When markets sell off and stocks fall, they tend to take everything down with them. But there’s a pocket of growth that could thrive in this environment, fueled by a new demand from new markets…

I call this sector “growth commodities.” And, U.S. cannabis is certainly a growth commodity. Cannabis is well positioned to take advantage of three key trends affecting future prices – global, industry, and technical.

Global: Inflation Is Good for Cannabis

From a macro point of view, commodities are a go-to sector when inflation begins to rise.

We talked about these dynamics in a previous essay, and how, since the election, inflation expectations in five years have almost doubled as commodities rose 30%… Rising more than three times the Nasdaq.

When most people think of commodities, they think of traditional products like oil, gas, and wheat… Not cannabis.

But cannabis is just another commodity. It needs to be grown, cultivated, and it uses a lot of energy… So, with energy and other input costs on the rise, the price of cannabis will rise as well.

Industry: Cannabis Is Getting Serious, Going Global, and Has Some Serious Pent up Demand

Legalization is a well-known trend in the industry…

There are three industry trends I’m excited about going forward.

  • Cannabis adoption is going global. This means more medical and recreational use.
  • There’s an influx of executives from top firms who are focusing on profits rather than just growth.
  • Favorable legislation towards the industry.

An important thing to note is that a harsh U.S. law, banning U.S. cannabis growers from listing on U.S. exchanges could disappear with the SAFE Banking Act. (The SAFE Banking Act would allow cannabis businesses to work freely with financial institutions – it was included in the COVID-19 Relief Bill passed in May 2020, but the bill failed under former President Trump. Hopes are it could pass in 2021 if reintroduced.)

The first two industry trends I mentioned are somewhat straightforward… But the last one – favorable legislation towards the industry – could be a game changer.

That’s because right now, U.S. growers of cannabis like Curaleaf Holdings (CURLF), a $10 billion company operating in 23 states, cannot list its stock on U.S. exchanges. Instead, they have to list on Canadian exchanges – a disadvantage to U.S. firms.

This means that even though U.S. growers are more efficient, profitable, and have better prospects, the value of these U.S. companies are worth just fractions of their Canadian peers.

So, if two companies both generate the same earnings, one can be worth significantly more just because of this law. This isn’t just a burden… It’s downright stupid. And at some point, it’ll change and bring with it an explosion of new investments for U.S. cannabis growers.

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Technical: Prices Are More Reasonable

Cannabis stocks have seen some volatility lately, falling around 45% from the recent highs. Some companies may have gotten ahead of themselves, but prices across the sector are more reasonable now.

On March 5, the Cannabis Index (green line) and the 50-day moving average (white line) overlapped and prices found support. Meaning, cannabis stocks have the potential for a breakout higher. Even though I favor American cannabis stocks, this index is a good representation of overall price levels for both the U.S. and Canada.

So, these three key trends are setting cannabis stocks up to continue their move higher. But, that doesn’t mean all cannabis is worth investing in, or that we’ll see less volatility…

The 3-Stock Retirement Plan: How to Retire Rich From Just 3 stocks

Finally, I would play these developments by focusing on American cannabis stocks valued above $1 billion… They’re undervalued compared to their Canadian peers, have a high chance of expanding, and are either profitable already, or on the path to profitability.

Stocks like Curaleaf (CURLF) and Trulieve Cannabis (TCNNF) are good examples. Also, a well-respected financial services firm, BTIG, just initiated coverage of both with price targets at 85%-100% above current levels. If their analysis is correct, these companies can double in price.

For ETFs, I like the AdvisorShares Pure U.S. Cannabis (MSOS). This ETF found a way to partly sidestep current laws and provide exposure to U.S. growers.

This ETF is the next best thing to owning U.S. cannabis stocks outright.

Regards,

Eric Shamilov
Contributing Editor, Market Minute

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Reader Mailbag

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