The trick is to put your money into businesses that are competitive no matter what happens in the economy.
You should be prepared to make the best of a bear market even if we don’t enter one in the foreseeable future. Suppose you have a lot of money in cannabis stocks. In that case, you should be prepared to make severe changes to your fair-weather approach whenever the bears emerge from hibernation.
Buying stock in a strong company aggressively growing in value is a safe bet. However, fast expansion in the cannabis business might mask many problems that a market slump would disclose. Let’s look at the causes of this phenomenon so you can safeguard your investments more effectively.
Profitability is Essential, But Valuation is Still Crucial
It’s essential to reconsider value in a bear market, especially if you prefer tiny rivals with rapidly growing sales. Companies with realistic profit margins and income diversification are more likely to survive a recession than those with unrealistically high values.
A company with broad income streams may be Scotts Miracle-Gro (SMG 2.35%), which offers gardening supplies to both regular customers and commercial marijuana growers. As a bonus, it is profitable, has a dividend, and has a trailing P/E ratio of about 14.3. This indicates that investors are ready to pay a P/E percentage for its stock lower than the market average of roughly 16.
As an alternative to expensive and speculative equities, Scotts will not likely lose investors during a bad market. Further, because Scotts pays a dividend, the increase in the dividend yield, which is now about 1.79%, will attract new purchasers and cushion the blow of the share price decline.
On the other hand, firms like Sundial Growers (SNDL 5.67%) are expected to take a significant hit in a declining market. Compared to pure-play firms that are both successful and expanding quickly, such as Trulieve Cannabis (TCNNF -0.53%), which has a P/S of roughly 4.6, this company’s valuation seems excessive. Investors will have less incentive to sell their Trulieve shares than their Sundial shares when the market experiences price pressure.
For this reason, you should only invest in cannabis companies that are neither expensive nor having trouble generating regular profits. That’s sound advice for buying stocks in any number of industries. Still, I’ll explain why it’s particularly pertinent in the context of the cannabis market below.
To prevent dilution, avoid meme stocks
In a depressed market, investing in shares of possibly expensive cannabis meme companies is riskier than ever. Meme stocks seldom qualify as “quality” when investors are making a flight to higher-quality investments, and this may soon lead to issues.
Sundial Growers, a fan favorite on Robinhood, makes the most of their time in the spotlight by releasing enormous volumes of new stock whenever retail traders raise the price of its shares. With the help of this technique, Sundial was able to expand into the cannabis investment banking market, which may help it turn things around.
However, meme stocks may find it difficult to issue new shares at a competitive price when the enthusiasm among small-time investors subsides, or the general market mood is unfavorable. It may be too late for the firms if they want funds for operations but are unable to get loans or other conventional funding, which is a prevalent issue for marijuana enterprises of all sizes.
Consequently, shareholders may experience a decrease in the value of their ownership, and the firm may not be able to recoup much of its costs. That issue won’t likely arise in successful marijuana enterprises. Avoid investing in the newest marijuana stock that retail investors are fixated on if you want to prevent this result.
Quality equities are always a good investment, no matter the market
A bear market doesn’t significantly alter things for healthy and reasonably priced cannabis firms like Trulieve or Scotts Miracle-Gro.
Their primary business operations won’t be impacted even if their stock price declines since they aren’t dependent on outside funding or issuing additional shares to generate cash. Additionally, because of their current fair prices, they are unlikely to be targeted by nervous or pessimistic investors.
Investments in high-quality cannabis firms that don’t need their price to be propped up by a horde of retail traders or their cash flows to be augmented by fresh share issuance are the best bet if you believe that pessimistic sentiment will persist for the foreseeable future. Gives your portfolio a more incredible opportunity to expand even if you are incorrect about the direction the market is heading.
Cash stocks have the advantage of being resilient to imperfect markets. That’s because there’s always consolation at the bottom of the bottle when things go awry. In a bad call, nobody cuts down on their cigarette use. In either scenario, more people will drink and smoke. And they won’t always choose a less expensive alternative. Cigarette markets have long been known for their high levels of brand loyalty, which typically range from 85 to 90 percent. The more you drink, the more devoted you become, and your liver despises you. According to the graph below from Statista, 40% of American tea drinkers who have been doing so for at least ten years stay with a single brand.
We now come to hemp. The only way to fully comprehend this market is to visit dispensaries often and pay attention to what is happening around you. We’ve invested a lot of effort into this, so we will utilize the findings to predict how cannabis stocks would respond to a recession.
Bear market for marijuana stocks
While the dollar’s value is now climbing, it will be rapidly declining in the future. As a result, all growth companies have suffered losses, including cannabis stocks. ETF AdvisorShares Pure US Cannabis (MSOS), the largest marijuana ETF by assets under management, has lost 54% this year. In comparison, the Nasdaq has lost 21%. The bulk of the marijuana thus dropped on his chin.
To have a stake in the contest, we merely bought one cannabis stock. This is a relatively tiny investment, and our desire to acquire a few more stores motivated us to write this essay. However, we must first consider whether our argument has altered the present lousy market. Will we increase our already meager holdings, or will we determine that cannabis has become too dangerous for our taste because of our risk aversion? Everything depends on how we anticipate cannabis users acting during a financial crisis.
Also read: Best Cannabis Stocks To Buy Long Term?
Susceptibility to Cost Changes
People can’t decide if you offer them too many options. You’ll experience “option overload,” a psychological condition when you enter the majority of cannabis stores. The vast array of goods on display is when your acquaintance will point you in the direction of the brand their friend is attempting to sell, and you’ll then express your gratitude with a tip. People will choose a particular product and be somewhat loyal to it if they can afford it to prevent option overload.
We anticipate that most cannabis customers will be price conscious during hard times. In other words, they will prioritize costs while making a purchase. This is supported not just by our in-depth investigation into the legal and grey markets, but also by pertinent academic studies like this one.
Twenty research measuring price elasticity were analyzed in the previous paper. The majority of the studies concluded that demand was inelastic about price (the market is said to be inelastic if the need for a good or service remains the same even when the price changes).
According to the research, customers would shop for the least expensive unregulated marijuana to prevent a drop in usage, and the price will be their primary deciding factor. This makes sense if you take into account that people who use cannabis often are also people who spend a lot of money on devil’s lettuce.
Two-thirds of all users smoke this marijuana daily, making up the majority of the marijuana smoked in the United States. In a decade-long, extensive research published in the Journal of Drug Issues, Americans of all ages with household incomes of under $20,000 accounted for 29% of all marijuana usage and 27% of all cigarette use in the country. (In contrast to just 13% of all alcohol consumption and 19% of all adults.) There are always methods to maintain your habit while spending the same amount of money when circumstances are dire. One example is Rick Simpson oil (RSO).
Fantastic Food Items
We’ll utilize the illustration of food goods to illustrate the dramatic price fluctuations in cannabis shops. You ought to try these if you haven’t already. According to what we’ve been informed, a typical dosage of 10mg produces a modest high that makes it easier to explore your IT assets. Our aim is to ideally spend no more than $1.50 per dosage. Thus an average nutritious package containing 100mg would cost $15.
It used to be $10, but these days it’s becoming more and more difficult to acquire anything outside of discounts for $15. This week, we discovered nutritional costs ranging from $17 to $35 for 100 mg at a random Washington dispensary. Most consumers of these goods are unaware of how inexpensive they might be if you look outside the box.
Most dispensaries sell the 1,000 mg pure extract known as Rick Simpson Oil (RSO), for between $18 and $36 each vial.
Per 10 mg dosage, it amounts to between 18 and 36 cents. Squeeze a quantity of edible food around the size of a rice grain, and then consume. This is but one illustration of how cannabis consumers might save costs during hard times. You might also purchase marijuana on the illegal market.
The dangers of the illicit market
The price of cannabis buds had dropped by more than 70%, and KQED reported in January that certain local taxes were close to 50%, making it practically difficult for California farmers to operate financially. Some contend that legalized cannabis is supported by the black market since consumers may find far better bargains there. A minority of manufacturers’ goods are sold to legal dispensaries.
Still, since the business lacks a rigid system of regulation, it is pretty simple for them to move their products to the black market. The research claims that some drugstores sell as much as 90 percent of their inventory on the black market. With California leading the way in marijuana legalization, other states might soon follow suit.
People will go for the least expensive high-end when their wages fall. While many of the well-known black market strains compete with, if not outperform, what is offered at dispensaries, not all of these high-margin edibles will seem appetizing. Also, keep in mind that when clients return to the good old black market, where everything was cheaper and much more straightforward, the novelty of cannabis shops and their 700 goods on sale will fade. The main obstacle for everyday smokers was catching a scent. This is no longer an issue. Therefore, they will probably smoke even more cigarettes if they can afford it.
What we have spoken about today has a lot of consequences. To compete on pricing, multi-state operators will first need vertical integration. They will be able to lower profitability while still operating a successful company since they would own the whole supply chain (one hope). Additionally, concentrating on a single state and gaining a more significant market share can ease competition and promote economies of scale.
The emphasis will be on operational excellence, essentially creating a model dispensary and replicating it across all sites after the dust from the recent purchase frenzy has settled. Same-store sales, which demonstrate how the present recession is influencing hemp customers’ buying behavior, and gross profit, which indicates that MSOs can continue to operate as viable companies in challenging circumstances, are essential metrics for hemp investors to monitor.
Suppose customers are as price sensitive as we believe they are. In that case, cannabis companies could not be as durable as other sin stocks. Some people can start shopping on the illicit market and return to their previous routines. Since cannabis has been legalized, it has become much simpler to drive about with an ounce of marijuana you purchased on the black market and put in a container from a licensed shop.
Wherever you bought this history is unknown to the police. Cannabis is becoming more widely accepted in society, and the underground market is flourishing. Investors should keep an eye out for tightening gross margins and declining same-store sales. This would show that customers are becoming more price-sensitive as circumstances grow tighter.