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Why Marijuana Stocks May Be the Market’s Surprise Post-Pandemic Winners

Last Updated September 23, 2020 2:03 PM
Laura Hoy
Last Updated September 23, 2020 2:03 PM
  • As the stock market rises aggressively, marijuana stocks could offer investors value.
  • Smaller stocks with narrow business models like Trulieve are a better bet than flashier companies.
  • Scotts Miracle-Gro is a shrewd pick if you’re looking for an established name with less risk.

With virus cases surging in several U.S. states, it’s anyone’s guess how the global pandemic is going to play out. Despite the uncertainty, shunning the stock market isn’t a smart move based on equity movements over the past few weeks.

Where should traders be looking to invest? Marijuana stocks.

The Horizons Marijuana Life Sciences Index is down nearly 20% from the beginning of the year, underperforming the wider market.

marijuana stock ETF
Marijuana stocks are down nearly 20% in 2020, while the S&P 500 is only about 2.5% lower. | Source: Yahoo Finance 

That means investors who are willing to take on the cannabis sector’s risks can find value in an otherwise expensive market.

Not only have pot stocks been largely overlooked over the past few months, but they could be some of the biggest winners in the post-pandemic world.

Marijuana Stocks Will Benefit from a Legalization Wave Set to (Finally) Arrive

The biggest hurdle facing marijuana stocks has always been legalization. Although several U.S. states have taken steps to legalize the drug, the federal government still treats it as criminal. That could change sooner than many investors think.

The pandemic has quietly shifted the question from whether the drug will be legalized to when it will be legalized. 

The reason? We’re in a ton of debt – and not just at the federal level.

government debt, marijuana stocks, pot stocks
Before the pandemic, U.S. debt had already risen above GDP. As GDP shrinks and spending skyrockets, government officials are going to be looking for ways to pay some of that down. | Source: Pew Research 

A study by the Center on Budget & Policy Priorities showed that 27 U.S. states were over budget by 10%  or more at the end of June.

By legalizing and taxing marijuana, state governments will be better able to pay for their pandemic-related expenses and offset a sharp decline in revenue .

A third of those financially strapped states are considering cannabis reform this year. And with a Democratic sweep in November looking increasingly likely , the federal government could follow.

Be Picky About Cannabis Stocks – Here Are Two Worth Watching

Profiting from this expected legalization wave isn’t as simple as buying every marijuana stock you can get your hands on. The cannabis sector has suffered from overcrowding, making it increasingly difficult to pick a winning company.

Professor Mike Barnes, a neurologist, medical cannabis expert, and founder of Maple Tree consultancy , says part of the reason the cannabis industry has been beaten down over the past year was the rapid rise of enormous, financially strained cannabis firms.

Barnes told CCN.com in an email:

The cannabis stock market has dropped in the last 12 months or so – significantly. Basically I think this is the larger companies being over committed financially and becoming so big that they could not adapt quickly to a very fast changing market  – becoming dinosaurs before they were meant to be. I think the smaller companies will survive well because they can adapt quickly, they can innovate in terms of product delivery systems and adapt to the market adjustments in terms of strain types that are needed for the medical consumer (who is increasingly knowledgeable).

With that in mind, here are two marijuana stocks worth watching.

1. Truelieve Cannabis

Trulieve stock, marijuana stocks, cannabis stocks
Trulieve stock makes for a good bet with its strong financials and focus on a single market. | Source: Yahoo Finance 

Trulieve Cannabis (OTCMKTS: TCNNF) is one small-cap bet for investors seeking out lesser-known cannabis stocks. Trulieve’s focus is on its home state of Florida , operating 51 dispensaries there— the bulk of its overall business.

That’s a stark contrast to peers like Green Thumb Industries, who’ve been expanding across the U.S. as quickly as possible. 

As Barnes put it,

Small and nimble is beautiful in cannabis just now.

2. Scotts Miracle-Gro

Small and nimble isn’t for everyone, though. If you’re looking for a cannabis play that doesn’t carry as much risk, Scotts Miracle-Gro (NYSE: SMG) is an attractive option.

Scotts Miracle Gro, SMG stock, pot stocks
Scotts Miracle-Gro offers investors a lower-risk way to bet on the cannabis sector | Source: Yahoo Finance 

The firm’s bread and butter is its garden-care products, which have seen impressive growth throughout the pandemic . Lockdowns gave people more time to work on their lawns.

While its garden-care business allows investors to hedge against risk, Scotts Miracle-Gro subsidiary Hawthorne Gardening gives the firm a “pick-and-shovel” foothold  in the growing cannabis industry.

Hawthorne sells everything indoor marijuana growers need— from hydroponic equipment to soil. In fiscal 2020, Hawthorne’s revenues are expected to make up a sizable portion  of Scotts’ overall sales.

Disclaimer: This article represents the author’s opinion and should not be considered investment or trading advice from CCN.com. Unless otherwise noted, the author has no position in any of the stocks mentioned.