Cannabis stocks went gangbusters last year. If you were invested in many of the stocks that doubled or tripled in value, congratulations. This year, however, pot stocks haven’t performed as well, with some of them down 20% to 60%.
Despite the volatility, one thing is certain: the cannabis industry will continue to grow over the next decade and beyond. According to one of the top marijuana analysts, the U.S. industry alone will be worth $80 billion by 2030.
The current sales figures are but a fraction of that number. Last year, Canada became the first western country to legalize recreational pot. The resulting domino effect could add billions of market value to the industry every year.
Although pot stocks have been volatile, that shouldn’t stop you from investing for the long term. It’s not necessary to buy at the absolute bottom to make a bunch of money.
In fact, those who wait for the perfect moment often miss the train entirely. If you want to ride the cannabis boom for years to come, here are your best bets.
Tobacco 2.0 There’s one major risk every cannabis investor will face long-term: commoditzation. Today, most growers are still scrambling to ramp production. Over the next 12 to 18 months, millions of pounds of weed could flood the market.
Regulation is keeping competition at bay, but over time, prices will fall, reducing the value of grower’s crop. There are two ways to battle complete commoditzation: pricing power and cost advantages.
When it comes to cost, larger players will likely win. That’s the story for nearly any commodity in history—if you have the scale, you’re likely a low-cost producer.
Armed with a $12 billion market cap, Canopy Growth Corp (TSX:WEED)(NYSE:CGC) is already significantly ahead of the competition in amassing scale.
In terms of pricing power, differentiation and branding will be key. If you have the largest marketing budget, odds are you’ll be able to build a moat around your product line-up. Even if smaller players succeed, you’ll have the capital to acquire what they’ve built. If the tobacco industry is any indication, big will be better when it comes to pot. Canopy Growth looks set to capitalize on its early lead.
Hedge your bets While the cannabis industry may consolidate over time, accruing big advantages to the largest competitors, that doesn’t mean small players don’t have room to run. Green Organic Dutchman Holdings Ltd (TSX:TGOD) is a perfect example.
Over time, don’t be surprised if this stock is eventually acquired by a larger peer, most likely at a large premium to today’s trading price.
What makes Green Organic so special is that 100% of its production is grown in accordance to organic agriculture principles. It’s one of the only growers focused on this niche. As cannabis production becomes commoditized, and prices fall, Green Organic has an opportunity to sell a differentiated product at higher prices.
After last year’s cannabis hype collapsed, investors abandoned Green Organic stock in favor of its larger peers. The company’s market valuation is down to $800 million despite analysts believing the company will hit $225 million in sales next year.
By 2021, this hyper-growth company could be trading at just two times sales. It’ll take a couple years to play out, but this stock has clear multi-bagger potential.
Ryan Vanzo has no position in any stocks mentioned.
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