5 Reasons Marijuana Stocks Were On Fire In 2017

Ron Strider

Well-Known Member
Though most eyes were transfixed on the astronomical rise of cryptocurrencies this year, among traditional equities it was marijuana stocks that really impressed Wall Street. Of those pot stocks with a market cap of $200 million or higher, a majority have at least doubled in value this year.

You might be wondering what's behind the big rally in cannabis stocks? While a generally bullish market has certainly helped, there are five other considerably more prominent reasons behind the rally in marijuana stocks in 2017. In no particular order, here's what set pot stocks ablaze this year.

1. Improved consumer favorability

One of the clearer reasons why investors are flocking to marijuana stocks is the consistent shift in the way the public views cannabis. There can't be growth if the public doesn't support it -- and let's just say the support is very much there, at least in the U.S.

In October, Gallup released its latest marijuana survey and found that an all-time record 64% of respondents favored the idea of legalizing weed nationally. Comparatively, this was up from 60% in 2016, and a big march forward from the 25% support this idea had back in 1995, the year before California became the first state to green-light medical cannabis. An April 2017 survey from CBS News showed similarly strong support, with an all-time high of 61% of survey-takers supporting the idea of legalization.

Favorability toward legalizing medical cannabis is even stronger. An August poll from the independent Quinnipiac University found that 94% of respondents supported the idea of legalizing medical cannabis, compared to a minuscule 4% who opposed the idea. With favorability growing, it's seeming likelier that pressure will be placed on Congress to consider rescheduling marijuana at the federal level.

2. Multi-level expansion

The marijuana industry has also excited domestic and international investors with its continued expansion.

It was a pretty quiet year in the United States, with Nevada opening its doors to legal recreational marijuana sales at the beginning of July, and West Virginia becoming the 29th state to legalize medical cannabis in April. The upcoming year should allow the American public to have a bigger say on the topic in a handful of states.

Beyond the U.S., however, we saw quite a bit of expansion. In June, Mexican President Enrique Pena Nieto signed a bill into law that legalized medical cannabis. That does indeed mean the only country in North America that hasn't legalized medical cannabis is the United States.

Germany also put its medical cannabis law into effect this past March, following a favorable vote in January 2016. As more countries jump on board, the pathways to acceptance and profitability open up for marijuana stocks.

3. A massive new sales channel on the horizon

A third reason marijuana stocks were on fire in 2017 is the expectation that our neighbors to the north, Canada, will legalize adult-use pot by July 2018.

In April, Canadian Prime Minister Justin Trudeau stuck to a campaign promise and introduced legislation that would legalize recreational marijuana. Though estimates vary, giving the green light to adult-use pot could add $3.7 billion to $5 billion in annual sales to the Canadian pot industry.

What's more, the pathway looks clear for it to happen. Canadian officials recently worked out a tax deal with the provinces on how they'll split the tax revenue, and progressive party members in parliament handily outnumber the conservatives.

The biggest beneficiaries, should Canada become the first developed country in the world to legalize recreational pot, would be Canopy Growth Corp., Aurora Cannabis, Aphria, and MedReleaf. These four giants might combine to control half the dried cannabis production in Canada, and they're expanding at a phenomenal rate.

Canopy Growth has 2.4 million square feet of capacity under development or construction, with the option to purchase another 1.7 million square feet. Meanwhile, Aurora Cannabis' 800,000-square-foot Aurora Sky project, and Aphria's 1 million square foot phase IV expansion, both offer 100,000 kilograms of annual production potential.

4. Rapidly growing broad-market sales

Yet another reason there's been a lot of buzz surrounding marijuana stocks is the rapid sales growth and potential within the industry. Regardless of the source, pundits expect significant yearly growth from the legal weed industry.

For instance, cannabis research firm ArcView is forecasting legal weed sales growth in the North American market of 26% a year between 2016 and 2021. If this estimate proves accurate, the North American pot market would be generating almost $22 billion in annual sales. Keep in mind that over $46 billion in sales are still conducted in the black market as of 2016, so there's plenty of opportunity to sway these consumers to legal channels.

By a similar token, Marijuana Business Daily's latest report, "Marijuana Business Factbook 2017," estimates that U.S. legal cannabis sales will grow by 30% in 2017, 45% in 2018, and an aggregate of 300% between 2016 and 2021 to about $17 billion.

Cowen & Co. has taken things one step further. By 2026, the investment firm believes U.S. marijuana sales could hit $50 billion. This type of growth is hard to overlook, which is why pot-stock investors have been diving in.

5. The first hints of profitability

Last, but not least, we're beginning to see that some marijuana stocks can actually be profitable. The aforementioned Aphria and MedReleaf have been profitable in each of the past two years, albeit on a relatively marginal basis. Still, for an industry that's predominantly illegal, any sort of consistent profitability is nothing to ignore.

The reason for these profits is twofold. First, medical cannabis market growth has driven strong sales growth and modest/marginal profitability for Canadian marijuana stocks. According to Health Canada in May, eligible patient enrollment was growing at 10% a month, providing more than enough demand and revenue potential to push some growers into the black.

Second, growers have expanded their portfolios to include a wider variety of products. Most notably, we're witnessing an increased push toward cannabis oils and extracts. As of the end of 2016, MedReleaf controlled nearly 45% of Canada's cannabis oils market; and since cannabis oils come with a higher price point and margin, the company has been able to earn more in profit despite similar annual sales to the more dried cannabis-dependent Canopy Growth Corp.

With plenty of momentum, marijuana stock investors are excited about 2018.

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