As a stock market observer, I’ve noticed a benefit of marijuana stocks over the past few years: they’ve been maturing. That is, the risk/reward ratio has been getting closer to fair–a point at which you can buy into a stock with favorable fundamentals, but still be reasonably confident that there won’t be a major meltdown. This is happening as a result of the pot industry maturing. Take for example the recent emergence of large-scale pot producers, who are now being valued as the next generation of oil and gas companies.
The marijuana industry is all about growth, and thus we see a lot of companies moving into the marijuana space, many with lofty goals of becoming the next big thing. However, not all of these companies can stand the test of time. Those who are here to stay are those who focus on the end user, providing a solid product at the right price, and service that’s supported by real value.
Marijuana stocks rise with new luxury items
One thing I keep an eye on in the marijuana stock market is its maturity. This means not only that large companies are expanding into new markets and generating more revenue, but also that they are finding new ways to develop, market and sell their products. We’ve seen an explosion in the luxury market lately, which gives us two big positive signs for the marijuana industry. The first signal is that the luxury market is starting to become its own segment in the industry. This opens up many new possibilities. Finally, luxury items typically have higher margins per unit sold (even though total sales are usually lower). Marijuana companies can expand their product catalog to appeal to luxury consumers, opening new avenues for revenue generation. Luxury products also offer the opportunity to further distinguish themselves from the competition. As the legalization of marijuana in Canada approaches, many of those stocks have gone public. And while the trend to make marijuana stocks public has slowed in Canada, it is gaining momentum in the United States. Many U.S. marijuana companies are vying for market share in what will be one of the largest (if not the largest) marijuana markets in the world once marijuana is legalized. With a growing number of stocks traded on both the major exchanges and the OTC market, it can be difficult for investors to determine which stocks can provide the best returns without examining the companies themselves and their financial performance. This is especially true for companies that offer similar products and target similar marijuana users. This is a risky proposition as the available market is limited. One marijuana stock will eventually be overtaken by another, resulting in potential losses. This information was confirmed by Nidha Lucky Handa, CEO of cannabis brand Leune, which is backed by famous NBA players Carmelo Anthony and John Wall, among others. For a long time, consumers only had a choice between stoner memes and a stoner-centric world, Handa explains. Would a consumer describe this? No, it isn’t. (Source: Pot Users Splurge on $800 Bongs as Stigmas Fade, Bloomberg, May 10, 2021). She is right, and this is an excellent opportunity to expand the marijuana market with products that will attract new consumer groups. The second important signal for the long-term health of the pot market is that the luxury sector will only be of interest to those who have the money to make luxury purchases. It’s simple: Luxury means money, and the fact that rich people get addicted to marijuana means that the drug is accepted at a higher level of society. Moreover, the rich are the same people who donate to campaigns and often exert a priceless influence on American politics. Because marijuana remains illegal at the federal level in America, high-net-worth individuals in some states are not only deprived of legal access to their drug of choice, they are also missing out on the best investment opportunities. Politicians can go so long against the will of the people (the vast majority of Americans want marijuana legalized in some form) and the will of the financial elite. It’s a recipe for political suicide. As more and more rich, influential and famous people push for the acceptance of marijuana, a deterrent Congress (or even the White House) will not be able to stem the tide. What does this mean for the bank’s equity investors? The simple answer is that the future of marijuana businesses looks brighter every day, even if the daily movement of marijuana businesses is questionable – or at least not always pointing in the right direction. The sooner marijuana is legalized in a major market (preferably the U.S., but Germany, France, the U.K. or a country of similar size would also be appropriate), the sooner investors can realize the full potential of marijuana stocks. And frankly, the closer that date gets, the closer the opportunity to get in before the hype sends cannabis stocks into the stratosphere. After all, there is only one way to profit from an emerging industry. That doesn’t mean that investors in marijuana companies that step in after legalization are doomed to fail. It is simply a statement that there is a limited opportunity to invest early to maximize returns.
The marijuana market continues to evolve in interesting ways. With each new direction in its development, we see new opportunities for investors. And that’s exactly what’s happening with the luxury marijuana market. At first glance, this new and growing market segment represents a huge opportunity for pioneering companies to identify niches, target them and maximize sales. It also allows investors to increase their exposure to the pot market while diversifying into different segments. During the COVID-19 pandemic, the welfare of many white-collar workers increased, while workers usually had a much harder time, at least in terms of work. This suggests that events that negatively affect one segment of the population do not affect other segments or even improve their situation. Therefore, diversity in an investment portfolio – even within individual sectors – is never a bad idea. Perhaps more importantly, the growth of the top end of the marijuana market is also testament to the growing acceptance of marijuana in all segments of society. Since there is already a large number of marijuana advocates among voters and politicians, it won’t be long before marijuana legalization becomes a reality in the United States and we see a huge explosion in the value of the marijuana market.
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