Cannabis 14 – Seeking Alpha

The following only makes sense if you think it is time to invest in the cannabis industry or marijuana stocks.

Cannabis is a commodity. It is traded based on the market demand and supply. The demand for cannabis has been steadily increasing for thousands of years while the supply has been only gradually legalized in the last decade. In the U.S., total cannabis revenue grew from $50 billion in 2010 to over $100 billion in 2017, and is expected to exceed $150 billion by 2020 (see Figure 1 below).

The pace of states legalizing the use of cannabis is the single most important determinant for the market supply. Between 2000 and 2010, for every one state legalizing cannabis, the legal cannabis revenue has increased by nearly 50%. Between 2020 and 2026, it is forecasted that revenue will increase by 24% for each additional legalized state. By 2026, the legal cannabis revenue will amount to $79 billion, 10 times 2014’s level. It is this speculation of outrageous growth that makes investing in cannabis stocks so speculative.

Lottery-Like Returns

Out of the 238 cannabis stock universe, 25 stocks or 10% have already been delisted. 75% of the stocks are trading at levels 80% below the first trade prices. Only 25% of them are at levels 150% higher than their IPO prices. It is this lottery-like returns which make investing in cannabis stocks almost like gambling.

Why A Cannabis Index?

Even if you buy into the story it is time to invest in the cannabis industry, it is clearly and extraordinarily risky to just invest in one stock. Basic finance principals suggest that owning around 15 stocks will effectively eliminate most of the idiosyncratic risk and leave the industry bet intact. Therefore, we seek to establish a 14-stock Cannabis Index (“Index”)

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