November 11, 2021

Why Now is the Best Time to Buy Cannabis Stocks

Midas Letter
Midas Letter
Why Now is the Best Time to Buy Cannabis Stocks
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2021 has not been the best year to buy cannabis stocks. There have been structural challenges around the weed stocks sector that have caused investors to look for better opportunities in a stock market that has generally boomed. As we approach the end of 2021, however, the disconnect from US multi-state operators (MSO) underlying businesses and their stock prices is at an all-time high. So if you are bullish on the sector from a fundamental value position, now could be the best time to re-enter the sector.

Why might investors not have bullish on the weed stocks industry in 2021?

  1. Not aware of company growth rates,
  2. challenges with federal illegality,
  3. poor price momentum in cannabis while other sectors have boomed.

So why is now the time to buy cannabis stocks?

“We’ve been investors in the sector since 2014, we’ve seen 7 or 8 downtrends now. Typically when we see those, the downturns are 50% and the uptrends are 100% plus. So there are lots of opportunities you just have to be nimble. What we think is that we’re closer to the start of the next uptrend than we are to the start of the downtrend.” –┬áStoneCastle Cannabis Growth Fund Portfolio Manager Bruce Campbell

In 2021, MSOs have seen big improvements to their financial statements. The large MSO players have seen revenues grow 25-50% and EBITDA growth upwards of 50-100%.

With new U.S. states rolling out programs, company financial improvements are only getting started. It takes time for companies to set up the facilities, infrastructure, and the market in each new state. Biden may be taking his time to change federal prohibition, but the trend is that more and more states will start allowing cannabis use, recreationally or medically.

MSO valuations have dropped from 20x EBITDA to trading under 5x EBITDA. But, the underlying fundamentals of the best MSOs are strong and growing. When the underlying businesses start to get recognized, the cannabis sector will see a massive turnaround.

Watch the full interview to learn why cannabis stock prices have been struggling, what portfolio managers are trading to deal with the market consolidation, and why now could be the time to buy weed stocks.

StoneCastle is hosting its Indicator Update Webinar. If you would like to watch, email [email protected] for details.

Transcript

00:00 – StoneCastle Cannabis Growth Fund Portfolio Manager Bruce Campbell
00:47 – US cannabis sector struggles
02:32 – SAFE banking act & negative catalysts
04:52 – StoneCastle Indicator Webinar
06:24 – StoneCastle Cannabis Fund
08:08 – Fundamentals disconnected from stock prices
10:31 – Is now the time to buy weed stocks?

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