That was one of the recommendations former hedge fund manager Whitney Tilson made at the recent Legacy Investment Summit in Washington, D.C.
And when Whitney speaks, it’s worth listening…
He started his own hedge fund, Kase Capital Management, from his bedroom with $1 million. Then he grew its assets under management to more than $200 million.
And he famously warned people in advance of the bursting of the dot-com and housing bubbles.
So today, we’ll look at why Whitney is so excited about cannabis stocks right now.
And I (Chris Lowe) will pass on the name and ticker of the exchange-traded fund (ETF) he’s chosen to play this setup.
As you’ll see, it’s a rare opportunity to buy into an explosive market megatrend at a steep discount.
It’s all in this next chart…
It’s of the North American Cannabis Index.
As you can see, it’s down 69% since it peaked in February 2021.
Don’t get me wrong… There have been some diamonds in the rough.
In my January 15, 2019, dispatch, for instance, I drew your attention to Innovative Industrial Properties (IIRP).
It’s a real estate investment trust (REIT) that leases growing facilities to U.S. cannabis companies. Since then, it’s up 257%.
If you bought legal cannabis stocks over the past couple of years based on other recommendations in these pages, though, you’re in the red in those positions.
As he told Summit attendees… that’s due to a combination of two factors.
Not only is further cannabis legalization inevitable… but valuations have also come back to Earth after last year’s washout.
Let’s look at each factor…
Cannabis is currently legal for medical use in 37 U.S. states and Washington, D.C. And it’s legal for recreational use in 19 of those states and D.C.
That gives about a third of Americans access to recreational cannabis… and more than half access to medical cannabis.
But cannabis is still illegal at the federal level.
That limits the addressable market for cannabis companies because it still excludes millions of Americans.
It also makes it hard for cannabis companies to use the banking system. They can’t open checking accounts or take out bank loans.
So once the folks on Capitol Hill get their act together and legalize cannabis at the federal level, two things will happen…
First, the addressable market for U.S. cannabis companies will explode higher.
About two-thirds of the country would get access to recreational cannabis… and roughly half the country would get access to medical cannabis.
Second, existing cannabis companies will have a much easier time doing business.
Cash transaction costs – such as storage and security – will go away. This will fatten margins and boost profits. They’ll also be able to access bank loans to expand operations.
It stands for the Marijuana Opportunity Reinvestment and Expungement Act.
It would end the federal prohibition of cannabis in the U.S. by removing it from the list of banned controlled substances.
It would also expunge federal cannabis convictions, allowing people found guilty on cannabis charges to get out of prison.
It passed the House at the start of the month. It probably won’t pass the Senate due to some of the more liberal provisions in the bill.
But even if bickering there holds up the MORE Act, the legalization trend will continue to create potential legal cannabis consumers.
And there’s another, more libertarian bill in the Senate. It’s called the SAFE (Secure and Fair Enforcement) Banking Act. It would let cannabis companies use the banking system like any other federally legal businesses.
But this time, Democratic senators are holding it up because it’s not liberal enough.
So Congress wants to move toward federal legalization. It’s just a matter of agreeing on how to do that.
And even without federal legalization… the U.S. cannabis market will blow up thanks to further legalization at the state level.
That will raise the annual spend on legal cannabis from about $27 billion in 2021 to $72 billion by the end of the decade.
That’s going by figures from cannabis industry research firm New Frontier Data.
And that’s on top of already jaw-dropping sales growth.
That $27 billion figure from 2021 was a 27% bump from 2020… and a 100% increase over 2019.
And that’s the kind of growth you want to be part of. As Whitney explained at the Summit…
You’re talking to somebody who’s never used cannabis – not once in my life. On top of that, I’m a value investor. And cannabis is notoriously a wild-west sector. Even so, I’m still bullish on this sector in 2022…
Polling from Gallup shows that about 70% Americans now support cannabis legalization. That’s up from 12% when Gallup began its poll in 1969. So I see the regulatory environment in the U.S. starting to look more like Canada’s, where cannabis is now legal nationwide. And even if that doesn’t happen, with more states legalizing, that means more people using cannabis over time.
As an investor, you want to get behind long-term market trends. Things like electric vehicles and artificial intelligence. Cannabis legalization is another of these trends.
As Whitney noted, he’s a value investor. He looks to buy growth at bargain prices.
And that’s the setup he sees in the U.S. legal cannabis sector today.
Take the AdvisorShares Pure U.S. Cannabis ETF (MSOS).
It’s the largest cannabis stock ETF in the sector. And it holds shares in only U.S. operators.
At the start of this year, the average price-to-earnings (P/E) ratio of the top five stocks in the ETF was 56. Today, they have an average P/E ratio of 32.
In other words, you had to pay $56 to own each dollar of profits those stocks threw off. Today, you can pick up a dollar of profits in the same five companies for just $32.
Back to Whitney…
I look for long-term growth stories that are virtually inevitable but where… for some reason… I can get in at reasonable valuations. That’s why I like U.S. cannabis stocks today.
Most institutional investors don’t own these stocks because of their complicated legal status. So you’ve got great fundamental growth in consumption of the end product… plus real revenues and profits… plus relatively cheap valuations.
That’s a great setup if you’re a patient investor who can cope with this sector’s famous volatility.
At our Summit, Whitney recommended buying shares in MSOS to profit from this setup. So consider adding some to your portfolio.
As the cannabis megatrend continues in the U.S. at both the state and federal levels, the companies MSOS owns in its portfolio will see huge gains.
Until tomorrow,
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Chris Lowe
April 11, 2022