For Cannabis Industry, 2019 = 2008: Acreage CEO

For Cannabis Industry, 2019 = 2008: Acreage CEO

Kevin Murphy, CEO of Acreage Holdings, had a strong message for the investment community this week.
 

“This is 2008 for the cannabis industry.”

It’s a powerful metaphor. With the exception of new investors, all vividly recall the sickening plunge in stock valuations.

In the U.S., the S&P 500 began 2008 at 1,378.76 and ended the year at 865.58. From its 2008 high to its 2008 low, the Index was roughly halved in value.

How does the cannabis industry compare in 2019?

In fact, North America-wide, the legal cannabis industry has fallen much harder and much longer than the S&P 500 fell in 2008. From its 52-week high (319.73) to its 52-week low (108.50), legal cannabis stocks have fallen by 65% — roughly two-thirds.

The other importance difference between the S&P 500 of 2008 and the legal cannabis industry of 2009?

The S&P 500 is an index of large-cap companies, in mature industries, with (generally) very modest growth rates.

In contrast, the legal cannabis industry is an emerging industry, with a huge growth rate, that is still in its infancy.

At surface level, Kevin Murphy’s message was more or less stating the obvious: cannabis stocks have fallen very hard. But there is an additional dimension to his message that becomes equally obvious as soon as we ask one additional question.

What happened with the S&P 500 in 2009?

The S&P 500 closed 2009 at 1,123.58. That represents roughly a 30% rise in the entire Index. It didn’t regain all its 2008 losses in one year, but it was a very respectable rise.

More importantly, it has risen every year since then (except 2015) and sits today at 3,165.87. But as noted, these are large-cap companies with modest growth rates.

What should we expect from the high-growth legal cannabis industry in 2020?

For investors who see 2008 as a close parallel, at the very least investors should expect cannabis companies to recover all of their 2019 losses – do the much greater growth rate of the legal cannabis industry versus the S&P 500.

Let’s assume the Marijuana Index (for North America) closes 2019 at today’s level: 112.76. That would set up cannabis stocks to triple in 2020 – sector-wide.

That is not at all implausible.

A mere glance at the chart above shows that cannabis stocks can rise much faster than they fall. The entire Index tripled in value to close out 2017 – in just over two months.

Was the year 2019 the cannabis industry’s “2008”?

It is a very reasonable hypothesis. For value investors who subscribe to this idea, the message is very simple. Get your marijuana stocks now, while they are still on sale.

Regular readers of The Seed Investor will recall seeing a very similar message here, roughly three weeks earlier.
 

Framed in different terms, but the same message as Kevin Murphy’s. We also quoted another rather well-known market pundit.
 

“Be fearful when others are greedy and greedy when others are fearful.”

Warren Buffett

The “fear” in the cannabis space is intense, stoked on a daily basis by the negatively slanted reporting from the mainstream media.

Officially, next month will be January 2020.

But don’t blame cannabis investors if many of them are seeing “January 2009”.
 
Published at Thu, 12 Dec 2019 18:00:00 +0000