The following article is sponsored by Schaeffer's Investment Research.
COVID-19 had a significant impact on many emerging sectors over the past year. We saw this influence in markets such as tech, cryptocurrency, electric vehicles, and cannabis. Looking at the cannabis market, in particular, the pandemic accelerated the adoption of cannabis reform across multiple states, resulting in a record-breaking 2020 for the industry.
The cannabis market not only experienced a notable 2020 but has seen significant YTD growth in 2021. As such, investors are looking at the sector now more than ever with many analysts bullish on the industry.
Matthew Timpane, senior market strategist at Schaeffer’s Investment Research, joined last week’s Benzinga Cannabis Capital Conference to provide attendees with some guidance on how to navigate the bull market forming around cannabis 2.0.
Timpane’s presentation went over what investors can expect from the cannabis market in 2021, which states to watch, as well as cannabis companies with promising net growth.
States To Watch
In last year’s presidential election, seven ballot initiatives for cannabis were up for vote across five states. Voters in Arizona, Montana, South Dakota, and New Jersey all voted in favor of the legal use of recreational marijuana.
Given the increase in cannabis reform and the growing support for marijuana legalization, federal legalization is looking like more of a reality. A Gallup poll from November showed that 68% of U.S. adults favored marijuana legalization in 2020 — the highest approval cannabis has held in U.S. history.
The result is that the U.S. is seeing both liberal and conservatives states voting on the issue of cannabis legalization.
Highlighted below are eleven states that Timpane believes investors should keep an eye on in 2021.
Connecticut ‒ Gov. Ned Lamont is making a push for the legal use of recreational marijuana
New Mexico ‒ multiple proposals in place for the legal use of recreational marijuana
New York ‒ multiple proposals in place for the legal use of recreational marijuana
Rhode Island ‒state legislators say they are in favor of legalizing cannabis
Virginia ‒ lawmakers approved a bill that would legalize the sale of recreational-use marijuana
Maryland ‒ lawmakers are considering a bill to regulate adult-use recreational cannabis
Minnesota ‒ approved a bill to legalize cannabis
Alabama ‒ filed a bill to legalize medical marijuana
South Dakota ‒ has both a House and Senate approved bill even after a judge overturned a 54% vote in favor of legalizing recreational use
North Dakota ‒ has a house approved bill to legalize recreational-use marijuana
South Carolina ‒ has a medical marijuana bill that’s currently gaining a lot of support
What To Expect
The first expectation Timpane believes investors should have for the cannabis market is volatility.
“You have to expect volatility,” he said. “With any new asset class — let’s be honest cannabis is still in its infancy here — you can expect it to be extremely volatile. So, if you can’t stomach new tech stocks, EVs, and crypto, it’s going to be hard to stomach swings in cannabis as well.”
Given the expected volatility, Timpane believes that traders and people who have pursued start-up investing in the past will also be best suited for investing in emerging cannabis firms. This type of trader is one who can manage risk, hop on trends quickly, and get off trends quickly if need be.
Timpane also believes that investors can also expect an increase in the total addressable market (TAM) as states come online. As more data is obtained and we see how much the market opens up and how large each market can become as new products are introduced, Timpane argues that this will likely result in a tailwind.
“You could have some headwinds as well when a state doesn’t approve recreational use or even medical use, but I think eventually it’s going to win out even in the most conservative states because the tax revenue is too much of a tax benefit to those states for them to hold out too long.”
Macro Overview & Companies To Look At
In his presentation, Timpane listed a few individual companies that he feels have the potential to demonstrate promising growth this year. Among those was Village Farm International Inc (NASDAQ: VFF), which has posted +50% YTD share growth and is expected to deliver net revenue growth of 31.89%. Looking at Schaeffer’s Volatility Scorecard, Village Farms has a current score in the 86 range, which according to Timpane, is a considerably high score.
Schaeffer’s Investment Research runs their Volatility Scorecard to assess how volatile a stock is. This is done by measuring a stock's realized volatility against the volatility expectations priced into that stock's options over the past year.
“We run a volatility scorecard to see how volatile a stock is, so when you are trading options you know that you can get that move to reach your targets,” said Timpane.
Timpane also highlighted companies Curaleaf Holdings Inc (OTCQX: CURLF), Green Thumb Industries Inc (OTC: GTBIF), Cresco Labs Inc (OTC: CRLBF), GrowGeneration Corp (NASDAQ: GRWG), and Innovative Industrial Properties Inc (NYSE: IIPR). According to Timpane, all five companies are expected to report net revenue growth above 45% over the next twelve months, with Curaleaf on pace for approximately 82% net sales growth.
Still, given the heightened potential for volatility among individual firms, Timpane also touched on the renewed market interest in broad exposure to the cannabis industry in the form of ETFs.
Looking at the AdvisorShares Pure US Cannabis ETF (NYSE: MSOS), which came out in September, Timpane noted a massive uptrend in the ETF from October to February. Timpane also looked at ETMG Alternative Harvest ETF (NYSE: MJ), which showed an uptrend over the past few months as well.
All told, between increasing legalization efforts in an array of states and the professionalization of the industry in those states that already have legal access, the cannabis industry circa 2021 is looking as high-growth as ever, though still not without its risks.
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