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December 4, 2019

Where Will Cannabis Go From Here?

Frank Cabibi

In times of uncertainty in the broader market, it is hard to make a discussion on why investing in certain companies or industries is the right decision. Currently, taking any long trades seem to be troublesome for me in a market that looks well overvalued, and finding certain opportunities in undervalued or oversold industries makes it even more difficult to be bullish when recession fears continue to loom over the heads of investors. So where should one look to when trying to decide what move is best for their portfolio?

Well, let’s look at some factors in our market as a whole: President Trump and China continue to butt heads over working out any sort of trade deal, and it seems as if little to no progress has been made. Since losing a major economic partner will look bad on anyone’s presidency, it is hard to see that he will not want any sort deal to work out. Tariffs stay in place, as well as efforts of negotiation, and that should be the case for Trump for as long as he intends to keep the economy afloat. And with the 2020 election approaching, keeping this potential deal “alive” should be a major priority. Cannabis, as well as the U.S. market depends on this.

With that said, let’s look at factors influencing cannabis and what the path looks like for the whole industry. Last year, Trump signed the Farm Bill to begin the initiative of legalizing the cultivation and distribution of hemp products. The bill also signed cannabis out of a Schedule 1 controlled substance, meaning that companies are not as limited by the government to grow and sell cannabis. It is now treated as an agricultural commodity, giving banks the opportunity to back these companies with greater ease. For better and worse, once marijuana becomes totally legal, we will start to see some fundamental changes.

What are the potential problems with this?

As we see an increase of support for cannabis, there could still be setbacks. Amidst the news, more and more cultivators will want in on the game, causing an inflated market of cannabis products. Legitimate companies will be under pressure due to the high volume of producers out there and will more than likely have to cut prices. So we may see big names like Canopy Growth, Curaleaf or Trulieve losing profits initially because of the guy growing in his backyard.

What does that mean for major players in the market?

Although this could cause some setbacks in the industry, the ease of bank protocols regarding cannabis cultivation will eventually outweigh every wannabe pot farm and help those who have already firmly established themselves. These factors will take time for the up-and-coming industry to thrive, and we can’t say how long. But, in time, big cannabis should finally start to outperform and make higher returns, weeding the little guys out and stabilizing the market.

Final thoughts

The marijuana industry dropped hard after an immense sell off from smart money. The overall sentiment on U.S. equities is sub-par and news will tell you there is a bubble forming left and right. And investing in an industry still in its infancy could prove to be scary if our market was to enter a recession. But overall, I am bullish on the industry; I have yet to put more money into cannabis regardless of how cheap these stocks look right now. I believe a buy in at these levels will be a great long term play, but it all depends on how long you are willing to let your money sit in the meantime.

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