This beaten-down growth industry could make you richer

This beaten-down growth industry could make you richer

In this industry, a little patience and a high risk tolerance should pay off in the long run.

Almost every industry had a bad year in 2022. But the cannabis industry had it even worse. Thanks to a lack of progress in regulatory reforms and higher competition, cannabis sales in the U.S. didn't grow in 2022 as they did during the pandemic.

On the plus side, marijuana users continue to regard cannabis as a consumer staple product, spending money on it despite rising inflation. According to MarketsandMarkets, the global marijuana market is expected to grow at a compound annual growth rate (CAGR) of 24.3% to $82 billion by 2027.

Let's take a look at what's going on in the cannabis industry this year and which cannabis stocks may benefit from this opportunity.

A bumpy ride for the pot industry

During the pandemic, the cannabis industry boomed as lockdowns forced people to spend money on marijuana to relieve stress and anxiety. However, as the pandemic faded, cannabis sales appeared to have plateaued. While more states legalize marijuana, many small businesses face increased competition. The American cannabis market is currently experiencing a demand-supply imbalance.

Leading cannabis companies Green Thumb Industries (GTBIF -3.99%), Cresco Labs (CRLBF -4.63%), and Trulieve Cannabis (TCNNF -4.04%) all saw revenue decline or stagnate in the last few quarters.

The story appears to be similar to what happened when Canada legalized recreational cannabis in 2019. Cannabis sales increased for the top players -- Aurora Cannabis (ACB -6.18%), Canopy Growth, and Tilray (TLRY -5.61%). However, the market has become saturated, making it difficult for once-hot players to achieve profitability.

Tilray, on the other hand, made a wise decision by merging with another popular cannabis company, Aphria. It managed to maintain operational profitability for 14 consecutive quarters. Tilray also has a strong presence in the European market, which could be beneficial in the long run as the European market expands. 

The chart below shows how quarterly revenue that increased following the pandemic has stalled. The illicit market, which is not taxable, poses an additional challenge to both the U.S. and Canadian markets. According to estimates, the black market in cannabis in the United States is worth around $60 billion. 

There is still hope for the pot industry

Though the current scenario suggests that cannabis companies cannot recover, there is still a wild card. Federal legalization in the U.S., while not certain right now, could be inevitable in a few years. Legislation such as the Secure and Fair Enforcement Banking Act (SAFE) could also help cannabis companies with financing, potentially reducing black market sales and boosting legal sales. 

Even if federal legalization takes time, more states may legalize cannabis this year, allowing cannabis companies to scale their operations nationwide. The market appears to be in a rut right now. However, Marijuana Business Daily predicts that combined U.S. legal cannabis sales will increase from $33 billion in  2022 to $52.6 billion by 2026. CNBC reported Chris Wash, CEO of Marijuana Business Daily, stated, "The long-term horizon is extremely bright. This is just what industries go through." 

Risky, but potentially profitable investments

Companies with a significant presence in key state markets, such as Green Thumb, Cresco Labs, and Trulieve Cannabis, stand to benefit greatly as the market expands. All three have more than 100 locations across the country. Despite the slowing revenue, these marijuana growers are making every effort to cut costs by closing underperforming facilities and engaging in strategic mergers and acquisitions.

With the acquisitions of SweetWater Brewing, Breckenridge Distillery, and Manitoba Harvest, Tilray is well-positioned to enter the U.S. market. However, it may have to wait until federal legalization to capitalize on the burgeoning U.S. market. All four are currently trading at low prices, with price-to-sales ratios ranging from 0.6 to 3, making them smart buy-and-hold investment opportunities.

Many industry experts believe that even minor regulatory changes could help the industry regain its footing. When it does recover, cannabis stock prices have the potential to rise, providing investors with a reasonable return on their investment. However, keep in mind that the cannabis industry is extremely risky, so starting with a small investment and a diversified portfolio is a good idea.

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