The recent rally in Marijuana and Alternative Pharma/Agriculture stocks has been impressive, to say the least. One thing we have to remember about this sector is that it rallied to highs in 2018 and 2019, then fell out of favor for many months. The anticipation of this new sector emerging within the US, and across many areas of the globe, prompted quite a bit of excitement after 2016 when many US states voted to legalize Marijuana. Even before this date, the alternative medicine and consumer product use related to Marijuana has been heavily speculated on by investors/traders.
If we were to consider the out-of-favor phase of this sector over the past 15+ months, after the rally/hype phase which took place in 2017 and early 2018, we’ve seen many cannabis stocks collapse 70% to 85% or more recently. This downward price trend likely set up a number of incredible opportunities based on expanded marketplace opportunities, enterprise valuations, and longer-term consumer/pharmaceutical use applications for CBD and other chemical extracts. Additionally, we need to also consider what would happen if a consolidation phase were to take place in this industry – how would cannabis leaders play a role in acquiring smaller, yet important, firms with innovative technology/solutions.
The MJ Alternative Harvest ETF Weekly chart below highlights the incredible decline in the cannabis sector after the August 2018 peak. MJ fell from a high of $45.40 to a low of $9.34 – representing a -86% decline. Aurora Cannabis (ACB) peaked at 150.34 in October 2018 and recently bottomed near $3.71 – representing a massive -97.5% decline.
Over the past two months or longer, this sector has started to heat up again with a moderately strong rally setting up. Over the past 14+ days, a big upside rally initiated pushing price levels upward by +80% to +150% or more from recent lows. Historically, when one considers the longer-term potential for growth, revenues and consolidation within this industry sector, we believe this rally may be just starting.
If we were to consider a potential continued focus on the Cannabis/Alternative Agriculture supply and industry sector over the next 4+ years, we would have to take a look at the deep decline in price levels recently and the opportunity for some type of industry consolidation over the next 5 to 10+ years. Obviously, this industry/sector is here to stay, and, much like the Alcoholic Beverage industry in the 1960s to early 2000s, we are in a very early stage of the legalization, expansion, and consolidation phase of this sector.
Using these two sectors for comparison, the first question is just how big is the Cannabis/Alt marketplace compared to similar types of markets? The Cannabis sector currently makes up about 1/10th of the total US Alcoholic beverage annual sales ($25.3B Cannabis: $252.82B Alcohol). From a conservative standpoint, Cannabis consumers very likely cross-over into the Alcoholic beverage consumer market on a fairly high basis. This means the consumer market for Cannabis is very likely 60% to 75%, or more, of the Alcoholic-beverage market.
The second question should be what additional advantages does the Cannabis/Alt sector have that differentiate it from the Alcoholic-beverage industry? That answer lies in an unknown factor – the pharmaceutical/consumer product use that is currently in its infancy. CBD has already shown great promise, but the long-term capabilities, use, and application of various alternative chemical compounds found in various strains of plants, mushrooms, and other organic sources are still part of the “X-Factor”.
The third question in our minds becomes, how long before these unknowns/X-Factor components become a reality? We can’t attempt to put the answer into dates or predictions, but we do believe the speed at which these organic compounds will be introduced and mapped-out into potential medical-use solutions has been clearly illustrated by the speed at which the COVID-19 vaccines/medical advancements have been delivered. These solutions only took “months” to come to market. If the same type of capabilities were applied to the Cannabis/Alternative marketplace, and thus toward the multiple supply/innovation companies within this sector, a massive boost of growth, innovation, and consolidation within this sector over time. Let’s take a look at some current statistics & data below.
Marijuana Tax Revenues by state appear to be strong and growing. One thing to consider about this Tax data is that a relatively large portion of actual sales are still going unreported (as illicit transactions).
Legalization & Acceptance of Marijuana within the US has now reached almost every state – with only six states still showing Marijuana is fully illegal. All other states have adopted Marijuana use in some form over the past 5+ years.
The US Cannabis Consumer Market is expected to increase by more than 15 to 20% in 2021 after more than doubling in 2020. From 2018 to 2021, the total consumer market was expected to increase by more than 350%. By the end of 2022, that ratio increases to levels beyond +450% compared to the 2018 levels.
Obviously, the deep price decline in the Marijuana sector, which recently ended, did not properly reflect the market capabilities and expectations for future growth and earnings. We believe this sector could become one of the hottest sectors for growth over the next 2+ years and it may prompt a massive consolidation phase within this industry which will create potential behemoth conglomerate Cannabis firms – very much like the Alcoholic Beverage industry.
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Founder & Chief Market Strategist