The stock market has had a soaring kickoff in 2024, marking a remarkable milestone with the S&P 500 breaking through the 5,000 threshold for the first time ever. While the success of big tech stocks has been pivotal to the index’s surge, the overlooked superstar of the stock market, cannabis, has been making serious waves.
Pot stocks have been climbing the value ladder this year as investors warm up to growth stocks, driven by optimism around a potential decrease in interest rates. The anticipation is that lower interest rates will ease borrowing costs, thereby mitigating the overall risk for growth stocks and unprofitable businesses.
Low valuations have made pot stocks more attractive
The AdvisorShares Pure US Cannabis exchange-traded fund has been vigorously navigating swaps of multistate marijuana companies, including big players such as Green Thumb Industries, Curaleaf Holdings, and Trulieve Cannabis. These titans of the U.S. cannabis market have not had a royal run on the stock market. Over the past three years, their valuations have all plummeted by over 60%.
Correspondingly, their price-to-sales multiples have substantially contracted as well.
CURLF PS Ratio data by YCharts
Irrespective of prospects for marijuana legalization in the U.S.—whether near, distant, or in limbo—projections for sizeable growth in the global pot market are steadfast. Last year, researchers at Fortune Business Insights projected that the global cannabis industry will burgeon at a compound annual growth rate of over 34% until 2030.
Given this long-term potential, investors are being enticed to bet on these stocks, particularly amid concerns that other growth stocks might currently be overvalued.
Why cannabis investors might be feeling a bit more bullish these days
While some pot stocks have been scorching hot right out of the gates of 2024 (Trulieve, in particular, was up around 90%), much of the frenzy is driven by speculation and optimism around potential marijuana reform.
There are reports that the Drug Enforcement Administration (DEA) is mulling over reclassifying cannabis to a lower schedule, dissociating it from Schedule I with other substances like heroin and ecstasy. However, even if this reclassification occurs, it doesn’t automatically imply imminent cannabis legalization.
There’s a tantalizing hope that Florida may have a shot at voting on legalizing recreational marijuana in November (it’s already given the green light for medical use). Trulieve, with its extensive footprint of 131 locations in Florida, could stand to reap the most benefits from the advent of a recreational pot market in its home state, perhaps explaining investors’ bullish feelings about its prospects.
However, there’s a lurking peril that neither of these developments could materialize. The DEA might choose to retain the current classification of cannabis, and Florida may forego the marijuana legalization vote. Cannabis investors have had their hopes dashed by the specter of marijuana reform before. A safe bet, nonetheless, is that Florida will legalize recreational marijuana sooner than the federal government makes a decisive move; 24 states and the District of Columbia have already waved the green flag for recreational marijuana use.
Is now the time to invest in cannabis stocks?
Pot stocks have not exactly been the apple of investors’ eyes in recent years. However, the industry undeniably packs a punch with its growth potential. For investors ready to take on the rollercoaster ride of risk and uncertainty and ride it out for the long haul, there’s a window for promising gains from pot stocks, considering how attractively priced many of them still are today.
Getting into a fund like the AdvisorShares Pure US Cannabis ETF could be a savvy way for investors to tap into the U.S. cannabis market, securing stakes in the cream of the country’s cannabis stocks. With the fund being actively managed, tracking new pot stocks or industry opportunities shouldn’t be a concern for investors.
However, it’s crucial for investors to tread cautiously and not assume that the current surge will sustain itself or that substantial federal reform is imminent. Setting excessively high expectations could singe investors. If, however, investors brace themselves for substantial volatility and a rather prolonged wait for substantial returns, investing in the AdvisorShares Pure US Cannabis ETF could prove to be a prudent move.
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David Jagielski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Green Thumb Industries and Trulieve Cannabis. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
