Are Cannabis Stocks A Good Investment? In the month of April, cannabis stocks took a brutal dive. Because I cover cannabis stocks, I received many messages from anxious investors wondering what was going on. Here, I want to show comparisons of the S&P 500 broader market and answer the question are cannabis stocks a good investment.
I will compare revenue growth rates for cannabis stocks versus the S&P 500. And, I will compare two important metrics for cannabis stocks: Gross Margins & Operating Margins, or operating efficiencies. When you compare revenue growth rate and you see the margins that cannabis companies are printing you can see that cannabis stocks are a good investment simply because they will outperform all other stocks in these metrics.
But, I caution investors considering investing in cannabis stocks. The business of building profitable cannabis companies is not an event, it is a process. And, while some of these cannabis companies are profitable already, there are other outlying factors that an investor should consider. The most important factor to are cannabis stocks a good investment is that most US cannabis stocks are still OTC traded.
Nonetheless, the moves lower in the stock market and cannabis stocks were crushing, understandably. But, we are also just on the cusp of great changes that will make cannabis stocks excellent investments. Let’s break everything down.
The Broader Stock Market as A Measuring Stick
I am going to compare the broader stock market against the top 5 biggest cannabis stocks – by market capitalization – to show how the broader stock performs. I will be looking at just a few metrics as a method of perspective. For the stock market, using the S&P 500 is a great way to get a bigger feel for how the overall stock market performs. I will be looking at revenue growth rates, gross margins, and operating margins.
Here are the numbers for the S&P 500 during all of 2021 – the entire 12 months:
- Revenue Growth: 21.1% Year-Over-Year
- Gross Margins: 44.4%
- Operating Profits: 17.8%
Keep in mind that the broader stock market performed quite well during 2021 – the entire 12 months:
For the 12 months of 2021, the stock market saw an almost one-way move upward to an all-time high.
With interest rates still very low, the economy moving forward at a strong pace, unemployment pushing to all-time lows, this was what propelled the broader stock market higher. The economy printed impressive overall numbers, and the stock market printed strong numbers overall. But, there are headwinds.
When good news is bad news
However, despite the great data we saw all throughout the 12 months of 2021, it was those numbers that also became the undoing of the stock market as a whole. Inflation, driven by year-over-year changes originating from three stimulus checks, saw significant increases in expenditures. Given a broken supply chain with high demand from this invigorated income increase, these depleted supplies forcing companies to start manufacturing even more supply to keep up with demand. However, the broken supply chain meant more companies were chasing fewer raw materials.
The War in Ukraine
Then, Russia invaded Ukraine. Major industrial nations embargoed Russian oil, and oil prices shot upward. This helped to drive inflation, already on an upward trajectory, far higher.
One thing to note is that with the SPR releasing some 1M barrels of oil per day, this will ensure there is far more supply to alleviate the shock of the Russian embargo as well as the ripple effects throughout the economy.
The Federal Reserve Reacts
As I write this, the Federal Reserve is beginning a 2-day meeting to determine the future pace of interest rate increases. With a 50-basis point increase already baked into the interest rate increase, it is the statement after the fact that we are awaiting.
The Stock Market falls from all-time highs
Nonetheless, the broader stock market fell from its all-time highs as the pressure of future interest rates makes investors readjust. It is this backdrop that the stock market fell 10% in the month of April. And, cannabis stocks came down along with the stock market
Are Cannabis Stocks A Good Investment
When you use the numbers above for the broader stock market, the S&P 500, you can see that there is a lot more potential with anyone cannabis company versus the stock market on a whole.
As I mentioned, I am looking at the top 5 cannabis companies by market capitalization. They are:
- Curaleaf – CURLF stock
- Trulieve – TCNNF stock
- Green Thumb Industries – GTBIF stock
- Cresco Labs – CRLBF stock
- Verano Holdings – VRNOF stock
Let’s break down each of these cannabis companies with their respective financial data and rankings:
- Revenue Growth Rate: 81.71%
- Gross Margins: 49.8%
- Operating Margins: 36.7%
- Revenue Growth Rate: 51.51%
- Gross Margins: 52.9%
- Operating Margins: 30.4%
- Green Thumb Industries
- Revenue Growth Rate: 69.4%
- Gross Margins: 56.8%
- Operating Margins:48.0%
- Cresco Labs
- Revenue Growth Rate: 62.4%
- Gross Margins: 58.5%
- Operating Margins: 38.4%
- Verano Holdings
- Revenue Growth Rate: 203.9%
- Gross Margins: 29.0%
- Operating Margins: 14.7%
When you look at the images above you can see how all of the financial data stacks up. You can look at Cannabis Stocks – Complete List: ranked here.
Cannabis Companies & Revenue Growth Rate
If you look at just revenue alone, you see that cannabis companies are printing big gains in revenue on a year-over-year basis. This eclipses the stock market. Keep in mind that cannabis companies are just ramping up the production of recreational cannabis products, medical marijuana products, and other items that have been prohibited for 100 years.
On the flip side, companies in the broader stock market are more mature. These companies in the broader market may have been in business over the past 100 years and revenue growth rates are going to be far more subdued comparatively.
And, something that is also important to keep in mind is that a lot of these cannabis companies are just starting to gear up. There is still a lot of growth opportunity for cannabis companies until they reach a saturation point
Cannabis Companies & Gross Margins
Here is another metric where cannabis companies far surpass those of the broader economy: Gross Margins. The cannabis industry is a long way away from saturation and needs to compete on price points. While there has been a lot of talk over the past couple of quarters about gross margins declining, cannabis companies are still outperforming other stocks by a whopping 15%, if not more.
And, the above list has the bigger cannabis companies. Many smaller cannabis companies are outperforming the bigger players.
Cannabis Companies & Operating Margins
Operating margins, or operating efficiencies, are a ratio showing total operating costs versus gross revenues. Because it is a ratio comparing costs, you want the lowest possible number. Here, the broader market is more competitive than cannabis stocks. However, that will not be for too long.
Remember, this is a metric showing operating costs relative to revenue. As revenue increases, and if operating costs remain low on a relative basis, this will mean that this metric will trend lower and lower. Cannabis companies are still growing toward where they will be in the future. Given that, with revenues increasing rapidly, and costs remaining contained, cannabis companies are very likely to outperform the broader market.
Cannabis Federal Legalization
Despite the fact that all stocks fell in April, there is still a major catalyst we await that will help to propel cannabis stocks higher: Cannabis Federal Legalization. While the House of Representatives has passed a version of cannabis federal legalization, we still await the Senate version. We are promised this will hit the floor of the Senate before the August recess to ensure that a vote can occur in the current session.
This would be a seismic catalyst for the cannabis industry and cannabis stocks. But, it would not be the catalyst that most cannabis investors are awaiting.
Up-listing To Nasdaq
The one event that would ensure the best outcome for all cannabis stocks would be up-listing to Nasdaq. Future cannabis federal legalization will likely clear a path forward for cannabis companies to utilize the banking sector lawfully. That will also enable these companies to up-list the Nasdaq.
Once up-listing to Nasdaq occurs, then real money can come in and invest in cannabis stocks. When you consider the growth rates of cannabis companies, and the fact that they are outpacing and outperforming the broader stock market, institutional investors will likely start to wade into cannabis stocks as an investment opportunity looking for higher rates of growth & return.
Once institutional investors start to step into the fray, this will bring a great deal of stability to the market. Large players with 9, 10, 11, and 12 decimal points in their investment portfolios will be able to acquire large amounts of cannabis stocks.
Are Cannabis Stocks A Good Investment
Despite the fact that there are still hurdles that need to be crossed with cannabis stocks as an industry, broadly you can expect that the cannabis sector will outperform the overall stock market. Cannabis has been prohibited for the past century. Now, states are legalizing cannabis in some form or another. Maybe states are legalizing medical marijuana, medical cannabis, or other forms of cannabis products for the use of recreational marijuana.
This will mean a tremendous growth opportunity here in the United States and worldwide. This means that cannabis stocks are growth stocks, unlike any other stocks.
What is a good cannabis stock to invest in?
If you wanted to find out what is a good cannabis stock to invest in, first you will want to start with the comparisons above and then look through other cannabis stocks. I have a complete list of cannabis stocks where I break down all of the various financial data in a way where you can sift through all of the information. It is easy to see which cannabis stocks outperform other cannabis companies.
Also, I have my top picks, the best cannabis stocks. I used the biggest 5 cannabis stocks, but these are not necessarily the best 5 cannabis stocks; you can see The Best Cannabis Stocks – My Top Picks here. You will see that some of these cannabis stocks significantly outperform the broader market as well as the top 5 biggest cannabis companies.
Cannabis Stocks As A Long Term Investment
I think it is important that you understand the foundation for my own investments in cannabis stocks. I am looking toward the long term. So, when I look at these opportunities, I see these as long-term growth stocks that will perform for many many years.
However, this is not to say that there are no opportunities for short-term traders. And, I believe we will see a lot of up-and-down in the markets over the next few months. This is an opportunity for an astute investor.
But, mainly I see cannabis stocks as a solid long-term investment that are both growth stocks as well as value investments. Over many years, these growth stocks will provide a great deal of value. So, if you are looking for value stocks, as well as growth stocks, I believe that the cannabis sector will handily outperform the broader stock market.
We are in the very early innings of a long-term sector ramping up. Those investors willing to see the opportunity in cannabis stocks as a long-term investment may also see that they will outperform the broader market.