The cannabis industry is a growing sector that investors may be overlooking right now. According to analysts at BDSA, global cannabis revenue will rise by 22% this year and be worth $35 billion. And by 2026, the global market will be worth $61 billion as it continues to expand at a compounded annual growth rate of over 16%.
With so much growth on the horizon and more states in the U.S. likely to legalize recreational marijuana in the future, this is an industry that could be full of promising investments. And if you're on the fence or haven't considering investing in marijuana, here's why now may be the optimal time to do so.
Image source: Getty Images.
There isn't much excitement about marijuana legalization right now
Marijuana stocks were much more popular a year ago after the Democrats obtained control of the White House and Congress and hopes were high that marijuana legalization may be imminent. However, as time passed and there was no serious progress on that front, interest and optimism surrounding the industry has fallen. And that's evident through data from web searches. Below is data from Alphabet's Google Trends showing the decline of relative searches for "marijuana legalization" in the U.S. over the past 12 months:
Data source: Google Trends. Chart by author.
Generally, when there is optimism around legalization or any sort of marijuana reform, that can send pot stocks soaring -- and it may only be a matter of time before that happens again. But that isn't the case right now. Investors are overlooking the sector, which explains, at least in part, the next point.
Valuations are incredibly low
Over the past year, pot stocks have been falling in price. The Horizons Marijuana Life Sciences ETF is down 58%, while the S&P 500 has increased by 14%. The main reasons investors are wary of the sector include a lack of profitability for many companies and no movement on the legalization of marijuana, and there are also problems related to too much supply, especially in California. Many stocks have fallen sharply as a result of that general bearishness (even though their own businesses may be sound), and are trading at much lower price-to-sales (P/S) multiples compared to a year ago. The average P/S multiple in the Marijuana Life Sciences ETF is approximately 4.9.
CURLF PS Ratio data by YCharts
These reduced multiples can help lessen the risk for investors, since many of the top pot stocks are available at a discount. There's an opportunity here, because many of these stocks are of successful, growing businesses that show lots of promise.
There are plenty of safe companies that are growing their bottom lines
Curaleaf Holdings, Green Thumb Industries, and Innovative Industrial Properties are among the safest pot stocks out there. And over the past year, their earnings before interest, taxes, depreciation and amortization (EBITDA) numbers have been rising, which is a great sign to investors that they are moving in the right direction, balancing both growth with profitability.
CURLF EBITDA (Quarterly) data by YCharts
Curaleaf is among the largest companies in the industry, with a presence in more than 20 states, and its trailing revenue over the past 12 months now tops $1.2 billion.
Now is an excellent time to invest in cannabis
Pot stocks are in the dumps, but the growth opportunities in the sector are still there. Many of these companies have been making progress over the past year, but overall bearishness in the industry has kept investors away from these terrific growth stocks. For opportunistic investors, now could be a prime time to buy shares of Curaleaf or other top cannabis companies before their values take off in the future, which likely will happen once there's some positive news in the sector again.
