There's a lot of concern in the markets these days with how tariffs will affect growth stocks like Nvidia and Apple and whether they drag down their earnings.
But one industry may be largely untouched by tariffs, and it could make for a good investment right now -- provided you are willing to take on some risk, be patient, and hang on for several years. The industry I'm talking about is cannabis. Here's why it could be an underrated place to invest today.
Why tariffs likely won't have much impact on the cannabis industry
Cannabis isn't legal at the federal level in the U.S., although dozens of states have still legalized it for recreational use, medicinal use, or both. The net effect is that cannabis companies can operate within a state that has legalized cannabis but cannot transfer cannabis across state lines. This means that companies effectively have to grow their products and operate within the state where they sell their products.
The same goes for Canadian-based marijuana companies. While Canada is charging tariffs on products that come from the U.S., cannabis is illegal and is barred from shipment across the federal border. Tilray Brands, which is based in Canada, recently reported earnings and stated that tariffs shouldn't have an effect on its sales.
However, one way that industry may feel the effects is indirectly, if the economy struggles and consumers have less purchasing power. In that case, spending as a whole can be down for cannabis and other industries.
Cannabis companies still make for risky investments
Although cannabis companies likely aren't going to need to worry about tariffs crippling their operations, they already have enough problems of their own. Without federal legalization in the U.S., it's difficult for companies to benefit from economies of scale. It's also a challenge to obtain banking services to help fund and expand their businesses.
Curaleaf Holdings (CURLF 0.66%) and Trulieve Cannabis (TCNNF 0.57%) are two of the largest cannabis companies in the U.S., and they struggle with profitability. While these businesses typically focus on adjusted earnings and can report profits that excludes certain expenses, it may be a long time before they consistently achieve true net income.
CURLF Net Income (TTM) data by YCharts
The good news, however, is that these companies are generating positive cash flow from their day-to-day operating activities. While they may not be profitable, their operations are sustainable and they aren't in any imminent danger of going out of business, despite the challenges they're facing.
Unfortunately, investors have become disillusioned with cannabis stocks over the years as their growth prospects simply haven't been very exciting, with national legalization of pot seemingly nowhere on the horizon. And it's typically when the outlook is favorable and hopes are high that legalization may be coming that pot stocks rally. During the past five years, however, the AdvisorShares Pure US Cannabis ETF has lost more than 90% of its value, signifying just how much pessimism there is in the industry.
OTC: CURLF
Key Data Points
Could investing in cannabis lead to big gains in the long run?
Investing in cannabis stocks comes with high risk. I don't expect pot stocks to really become hot buys until the prospects for marijuana legalization significantly improve. And I would be shocked to see any significant progress made under the current administration. That means it could very well be years before there's any change. If you're not willing to hang on for at least five-plus years, then investing in the industry is probably not going to be suitable for you.
However, given how drastically valuations have come down in the industry, you can invest in cannabis companies such as Curaleaf or Trulieve. They are among the safer options, with dirt cheap prices, and you can hold them in your portfolio and forget about them for a long time. The payoff can be significant because if marijuana is legalized, these stocks could soar. It's not a guarantee and it comes with some considerable risk, but if you're willing to be patient, then it may be worth allocating a small chunk of your portfolio to these types of stocks.
