The COVID-19 pandemic has wreaked havoc on the global economy. For most businesses, the struggle is continuing, while a few -- like those in the healthcare sector -- are comparatively secure, with the companies within working to fight the crisis. Healthcare might be a predictable safe space amid the pandemic, but there's one flourishing sector that's more of a surprise: marijuana.
The hype for the marijuana industry was intense during and after Canada's legalization of cannabis for recreational use in October 2018. In the U.S., medical marijuana is legal in 33 states and the District of Columbia, while recreational use is legal in 11 states and D.C. As legalization progressed, investors showed interest in emerging Canadian and U.S. cannabis companies.
However, the industry suffered in 2019 from a host of issues -- regulatory scandals, black-market sales, and many other factors. Stock performance took a nosedive. The struggles continued into 2020, and then the pandemic hit.
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Governments in the U.S., Canada, and beyond announced lockdown measures, and consumers began to hoard marijuana. As sales surged, Canada and some U.S. states had to declare marijuana an essential item, ensuring consumer access to it even as many businesses were shuttered. And even amid the pandemic, legalization efforts are continuing in several other U.S. states.
The U.S. cannabis industry is outperforming
Marijuana is still illegal on a federal level in the U.S., but interestingly, the U.S. cannabis industry is growing nonetheless. Medical cannabis is in particular demand, as recreational cannabis has not been deemed essential in as many states. However, recreational sales also grew in states where it is an essential item.
California remains the strongest cannabis market in the U.S. With a population of 37 million, the state recorded $248 million in adult-use cannabis sales in April. Washington, D.C., with a population of 720,687, recorded almost half that much over the same time -- $106 million. In Illinois -- a comparatively new market with a population of 12.7 million, where recreational cannabis was legalized Jan. 1 -- sales have been robust, with $37.3 million in legal weed sales in April, the first month of a complete lockdown.
Headwinds for the Canadian cannabis industry
Canada, on the other hand, is seeing a distressed cannabis market, especially when compared with expectations for life after legalization. Rising black-market sales and a slower-than-expected rollout of legal stores are restricting industry growth. These were among the many factors that affected Canadian cannabis companies' performance last year.
Currently, the provinces of British Columbia and Alberta are leading the pack when it comes to retailers, with 446 and 181 stores respectively. Ontario, Canada's most populous province, is lagging, with just five dozen. If not for the pandemic, more legal stores could have opened this year in Ontario -- a key factor affecting Canadian sales.
The pandemic made CIBC Capital Markets (an investment banking subsidiary of the Canadian Imperial Bank of Commerce, or CIBC) slash its recreational cannabis sales forecast to $2.5 billion Canadian dollars for 2020, compared with an earlier estimate of CA$3.4 billion. It also lowered its 2021 forecast, to CA$4.1 billion from CA$5.5 billion.
As CIBC analyst John Zamporo noted, "The catalyst for the Canadian cannabis market in 2020 was obvious: a wave of stores in Ontario -- and, to some extent, Quebec and British Columbia -- was set to propel the industry. COVID-19 has now brought about serious doubt as to when this might occur. Even once conditions allow more freedom of movement, it will take time for regulators to work through the backlog of store authorizations."
The sun is finally rising on marijuana stocks!
With rising cannabis sales, most cannabis companies recorded good first-quarter results. U.S. cannabis companies, in particular, are outperforming Canadian peers, with Chicago-based Cresco Labs (CRLBF 1.51%) and Wakefield, Mass.-based Curaleaf (CURLF 2.70%) announcing tremendous revenue growth in their most recent quarters.
Recently, Green Thumb Industries (GTBIF 1.58%), also headquartered in Chicago, announced first-quarter revenue of $102.6 million, a 267% increase from the same quarter a year ago and a nearly $30 million jump from $75.8 million in the fourth quarter of fiscal 2019. Organic growth across its consumer packaged goods and retail businesses drove the Q1 sales.
Meanwhile, Aurora Cannabis's (ACB 18.15%) third-quarter results were a tremendous surprise. The company began to lose investors' trust in 2019 when it started missing its revenue and profit forecasts and seeing turnover in its executive suite. It even had to execute stock consolidation to save itself when the price dipped below $1, which put it at risk of being delisted by the NYSE. However, it reported year-over-year growth in revenue of 16%, to CA$75.5 million, in Q3, up 34.8% from the second quarter of 2020.
Aurora's consumer cannabis revenue, which included sales from Daily Special (a proprietary strain of marijuana launched in February) and a few cannabis 2.0 products (oils, edibles, etc., that were launched in December), came in at about CA$41.5 million, up 24% from Q2 2020. And medical cannabis revenue -- from both Canadian and international markets -- also grew by 13.5% from the second quarter.
Shares of Aurora and Green Thumb are up 103% and 31%, respectively, so far in May, while the SPDR S&P 500 ETF has gained 4.3%.
Long-term game
That said, all is not rosy for the marijuana sector. It's hard to know whether currently rising marijuana sales depict a strong demand or just panic buying. We'll gain some clarity if sales keep rising even after the pandemic retreats.
Cannabis companies also have a long way to go in continuing to roll out cannabis 2.0 products, and headwinds -- such as a delay in the launch of products, the ongoing slow rollout of legal stores, or a continued rise in black-market sales -- could still pose challenges.
But if you are a long-term investor with a good appetite for risk, an evolving industry like marijuana might just be right for you. I like Cronos (CRON 4.66%), which is seeing revenue rising with no debt thanks to strong financial backing from tobacco giant Altria (MO 0.70%). Aphria (APHA) is also an intriguing cannabis bet with a strong balance sheet and leadership team.
