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Bet on Cannabis as States Need Extra Revenue

Legal cannabis stocks are showing signs of life again…

It’s all in this chart.

It’s of the Horizons Marijuana Life Sciences Index ETF (HMLSF).

This exchange-traded fund (ETF) tracks shares in 33 leading global cannabis stocks. This makes it a useful stand-in for the cannabis sector.

And after an 80% plunge over the previous 12 months… it’s up 46% since March 18.

That’s a new bull market.

And as you’ll see today, it’s only getting started.

First, I (Chris) want to welcome new readers…

The Daily Cut is the premium e-letter we created for paid-up readers of Legacy Research.

It’s a daily bulletin of the best moneymaking… and wealth-protecting… ideas from Teeka Tiwari, Jeff Brown, Dave Forest, Nick Giambruno, and the rest of the Legacy team.

There’s lots to cover.

We have more than 400 open recommendations across 17 investing advisories. Plus, we put out seven daily e-letters.

It takes me and a team of three hours to read through it all each day. And a lot of folks simply don’t have that kind of time.

So we deliver the choicest cuts each day. Our mission at the Cut is to bring you the timeliest… most compelling investing ideas each weekday.

One of the big ideas we’ve been tracking for you is the wave of cannabis legalization sweeping North America.

I’ll get into why we still believe in this megatrend… despite the horrible bear market we’ve just been through.

But first, I want to address, head-on, some of the negative impressions folks have about cannabis.

We’ve gotten a good deal of pushback over the years from readers who are convinced cannabis is an unhealthy vice.

And it’s no wonder…

For almost a century, the feds have tried to drive it underground.

States had already started to clamp down on cannabis at the turn of the last century.

But in 1937, the feds got involved. And Congress passed the Marihuana Tax Act.

Up until then, pharmacies and drug stores could sell cannabis products so long as these products were properly labeled and regulated. But the act effectively banned the practice by imposing a bevy of outrageous taxes, levies, and restrictions on all cannabis sales.

Then in 1970, Congress passed the Controlled Substances Act. This classified cannabis as a Schedule I drug, on par with heroin or Ecstasy in the eyes of the law.

And if you’re of a certain age, you may think of “pot“ as something only hippies are into. A more modern version of the stereotype is the “stoner” teenager playing video games in his parents’ basement.

But today, roughly 22 million adult Americans of all walks of life use some form of cannabis each month.

And according to a survey by Pew Research, 67% of Americans – more than two in three – support cannabis legalization. That includes 55% of Republicans.

Cannabis also has revolutionary potential as a medicine…

The Food and Drug Administration (FDA) has already approved a cannabis-based drug, Epidiolex. It reduces seizures in kids with epilepsy.

The FDA has also given Marinol and Syndros the green light. These drugs use a synthetic version of THC – one of the psychoactive compounds in cannabis – to help combat nausea and vomiting in folks undergoing chemotherapy.

And researchers are looking into how cannabis can help combat everything from post-traumatic stress disorder (PTSD)… to cancer… to chronic pain… to Alzheimer’s disease.

But there’s another tailwind behind the legalization megatrend. Cannabis is bringing in billions of much-needed dollars to state governments.

That’s now more important than ever…

Unlike the federal government, states can’t digitally “print” new dollars to fund their spending.

They rely on taxes instead. And COVID-19 is crushing their tax revenues.

It’s something colleague and former hedge fund manager Teeka Tiwari has put on his readers’ radars. And I want to make sure it’s on your radar, too. Teeka…

The National Association of Counties represents county governments in the U.S. It says local governments will take a $198 billion loss in tax revenues due to COVID-19. That’s not even considering losses at the state and federal levels.

Taxes on cannabis sales can help fill that gap. Last year alone, legal cannabis businesses put $1.9 billion in taxes into state and local governments. That’s a massive contribution from an industry that is still illegal at the federal level.

And you can expect that contribution to keep growing.

Just look at the boost to sales during the pandemic…

This year, for instance, cannabis sales in California have been 53% higher than last year.

Oregon posted a 58% jump in sales over last year. And Colorado announced it saw record monthly sales of $192 million in May.

And in July, Illinois shattered its monthly sales record. Dispensaries in the state sold $61 million worth of cannabis over the month. That’s about 28% higher than the previous monthly record of $47 billion sales there reached in June.

That growth makes sense. Folks are anxious about the pandemic. They’re locked up at home in many cases. And studies have shown cannabis helps with relaxation and anxiety.

What’s the play here?

Cannabis stocks are still widely hated after the brutal rout last year. But underlying revenues are rocketing higher.

And that’s usually a great time to buy. Teeka…

When the fundamentals improve in a massive way, but the price doesn’t… that’s your signal there is big money to be made. When I see this happen, it’s almost like I can smell the money.

Once sentiment finally catches up to the reality of booming sales and increased legalization, we’ll see a new up cycle in cannabis just like we’re seeing in cryptocurrencies such as bitcoin.

If you already own cannabis stocks, Teeka recommends doubling down on the ones trading below a price-to-sales (P/S) ratio of 1. That ratio measures how much value shareholders place on each dollar of sales.

And if you want a simpler way to play this trend, consider HMLSF. As I mentioned up top, it holds a basket of top legal cannabis stocks. So it will give you broad exposure to this megatrend.

Just remember to treat these stocks as a speculation. I’ll leave Teeka with the last word on that…

Cannabis stock investing is high-risk, too. But the beauty of these plays is you need only a small stake to make large gains. That’s why we call them “asymmetric plays.” The amount you can make versus how much you have to risk is wildly out of proportion to your initial investment.

For instance, I’ve had readers who saw $1,000 investments become worth over $1 million. That’s the true beauty of early-stage investing in assets like crypto and cannabis.

If you’re a smaller investor, he recommends you never risk more than $200 to $400 per legal cannabis stock. And if you’re a larger investor, he recommends positions of between $500 and $1,000.

Until tomorrow,

Chris Lowe
August 10, 2020
Bray, Ireland