Investors: Is the Time Ripe to Bet on Cannabis Once Again?

Will cannabis stocks rise again before Canada legalizes edible products next month?

Cannabis stocks have fallen.
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Several cannabis stocks have created significant investor wealth over the years. Stocks such as Aurora Cannabis, Canopy Growth, Hexo, and Aphria have generated staggering returns over the years.

Cannabis stocks gained tremendous value just before legalization in October 2018. While ACB rose 90% between December 2017 and October 2018, Canopy was up 97% between December 2017 and September 2018. Hexo rose 150% between January last year and April 2019, and Aphria gained 230% between October 2017 and January 2018.

The next wave of legalization is getting close. Cannabis edibles are expected to hit the shelf by the end of 2019. This is where investor optimism can take cannabis stocks higher yet again.

Huge market opportunity

Cannabis stocks experienced a correction in the last six months, as they were overvalued and trading at expensive valuations. Now the pullback before the edible’s legalization might provide an attractive opportunity for investors.

The consumers will be exposed to a range of products such as concentrates, vapes, and topicals in addition to edibles. The recreational consumption for these products will be legalized on October 17, 2019. But the products will be available for purchase by mid-December.

In the U.S. edibles are already sold in states where cannabis use is legal for recreational purposes. According to Arc View, the edibles market is estimated to reach $4.1 billion by the end of 2022, up from $1 billion in 2017.

The report states, “Consumer spending on cannabis-based food and drink reached an estimated $1 billion in 2017 in the United States and Canada, representing about 11.4% of the total $9.1 billion in consumer spending on consumable cannabis in those two markets.”

According to the Arc View report, over 64% of marijuana consumers in Colorado have tried some form of edible. This number stands at 55% in California.

While the edible market will grow at a double-digit rate, this growth will come at the expense of traditional cannabis. Arc View expects traditional marijuana to account for 36% of the total market, down from the earlier estimate of 50%. The concentrates will account for 36% of the market, up from 23%, while edibles will account for 14%, up from 12%.

Regulatory issues remain a concern for investors

While Canada is all set to legalize cannabis-infused edible products, there are some regulatory concerns. The populace might be worried about edible products such as candies and other baked goods (read: brownies) that might attract the attention of children.

There is also the problem of overconsumption in terms of edibles that might have a negative reaction in some cases. Health Canada will be sure to issue guidelines for cannabis companies but there is bound to be some sort of discrepancy.

Overall growth is robust and should cheer investors

While edibles are expected to flood the market by December 2019, the overall growth story for cannabis companies remains intact. Grand View Research has estimated the global cannabis market to reach $66.3 billion by the end of 2025. The annual growth is estimated at a solid 23.9% in the forecast period.

The cannabis stocks have lost significant value recently and are trading lower than their all-time highs. There are signs of another upward spiral for these stocks. In the last week, Aurora Cannabis shares rose 9.3%.

Other top companies such as Canopy Growth, Aphria, and Hexo rose 15.9%, 11%, and 14%, respectively. Horizons Marijuana Life Sciences Index ETF has risen 7.5% in the last week.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Aditya Raghunath has no position in any of the stocks mentioned.

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