The Resilience Of Cannabis Amid COVID-19 Volatility: Is Marijuana An Investor Safe-Haven?
By Hershel Gerson, CEO and Managing Director of ELLO Capital .
In the vastly disrupted economic and social reality created by the COVID-19 pandemic, many industries appear to be trapped in a downward spiral. As international airlines, hospitality providers, and a broad range of other sectors seek bailouts and federal assistance, the cannabis industry has shown signs of thriving amid the volatility.
Cannabis – and related industries, including hemp and CBD – have grown over the last several weeks, despite a multitude of regulatory and operational difficulties. In 2019, the cannabis industry experienced growing pains and market corrections that shook confidence in the sector for some investors. But as the COVID-19 crisis expands, the situation is showing signs that it could be a catalyst for growth in the cannabis market. Current data supports anecdotal evidence of increased demand, and the potential for social change suggests the uptick could be a precursor for a new era of acceptance.
“Lines Around The Corner” For Cannabis Retailers
Current estimates for self-quarantine and social distancing efforts range from two weeks to several months. In response to the flurry of “Shelter at Home” and other self-quarantine orders last week, the public responded by stocking up on cannabis products to help endure the coming days of isolation. For example, in California, adult-use sales spiked by 159% on March 16th in a same-day sales comparison to 2019. The state of Washington exhibited a 100% increase in sales in the same comparison. In Massachusetts, where many dispensaries have traded walk-in service for a “to-go” style model, lines stretch around city blocks, and the state has allowed deliveries to be expanded to promote social distancing.
Will Demand Last?
The surge is a result of adult-use customers flocking to stores to stock up for the weeks to come. Medical patients, who rely on cannabis as a less addictive and more natural treatment for chronic pain and conditions such as anxiety, multiple sclerosis, and Parkinson’s disease, have gotten in line to assure that their supply won’t run dry.
While sales have levelled-off following the initial spike, many state officials across the country have assured communities that dispensaries are akin to pharmacies and will not be shut down. States that have officially declared cannabis as “essential” include: California, Colorado, Connecticut, Florida, Illinois, Maryland, Massachusetts, Michigan, New Hampshire, New Jersey, New Mexico, New York, Ohio, Oregon, Pennsylvania, and Washington State.
In addition, the cannabis industry is poised to have a sturdy supply chain that may prove resilient to COVID-19-related issues affecting other sectors. Firstly, many leading cannabis businesses are vertically-integrated, meaning they cultivate, process, package, distribute and in many cases, retail cannabis within the same organization. This structure helps minimize disruptions related to one cog of the supply chain breaking down and proves the resiliency of a vertical strategy in a relatively nascent industry. Additionally, the regulatory structure of cannabis in the U.S. prohibits intrastate transit and sale, meaning if issues arise in one state, it will have to little to no effect to other markets. And finally, the cultivation and processing of cannabis is largely mechanized for many enterprises and held to “pharmaceutical-levels” of quality control and testing, which contributes to safety measures for both workers and consumers.
The combination of these factors are likely to contribute to the enduring resiliency of the cannabis industry as the economy continues to weather some of its worst days since the Great Recession.
Long-Term Social And Psychological Impact
There is ongoing optimism that mandated social distancing policies will result in a general expansion of consumer acceptance and demand for adult-use and medicinal cannabis products. Admittedly, there are concerns that the pandemic will limit legalization efforts due to an overall breakdown of legislative bodies’ ability to meet and vote. But in the long term, there is confidence that the beneficial effects of cannabis, particularly in a situation with widespread anxiety, will motivate voters and legislators to accelerate legalization efforts at the state, and ideally, federal levels. Not to mention, that with the complete breakdown of certain industries; including travel, entertainment, and dining, that states will be looking for steady sources of tax revenue to make up for short-falls, and the potential for booming tax revenue numbers in legalized states will serve as a prime example of the fiscal upsides of a regulated and taxed cannabis market.
Such analysis is purely speculative at this point, but should be considered as a possibility when forecasting cannabis market demand in the long-term.
Cannabis As An Investor Safe-Haven
In a newly bear market where airlines, retailers, and entertainment corporations across the globe have seen their values drop quickly and drastically, sharp sales increases, protections from government action, and increasing acceptance in the market, has provided cause for optimism that cannabis will remain buoyant. For risk-averse investors, who dread the bottom falling out of their portfolios, cannabis presents an intriguing option to protect capital.
When assessing investment opportunities in the Cannabis sector, there are a few things investors should look for:
- Cash on Hand – Cannabis companies with significant levels of cash are better suited to weathering a crisis such as the COVID-19 pandemic.
- Strong Business Fundamentals – Cannabis companies that are currently profitable, or project to be profitable soon, represent a safer opportunity.
- Seasoned Leadership – As the cannabis industry matures, there has been an emerging trend of founders and CEOs exiting and getting replaced by executives with broad operating and management experience in more mature industries that have weathered past economic disruptions.
As the industry continues to expand in the broader market, the result will not only be an investment that appears to be resilient through a crisis, but one that is waiting to boom over the next five to ten years. In comparison, travel, hospitality, and the financial industries are poised to feel the impact of the rolling recession years after a vaccine is secured.
The world is facing a unique crisis and countries everywhere are scrambling to handle the impact. As the U.S. makes every effort to flatten the curve, the market response suggests the long-term viability of cannabis is accelerating upward, as other industries remain less certain about their future.
The preceding article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.
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