In all likelihood, most stocks will fall into categories 2 and 3. There will be few companies spared a revenue hit this year, and few companies that benefit in real time. Some may benefit in the longer term but be pressured this year. Where will cannabis stocks fit in this construct? In my view, many of the cannabis companies may ultimately fit in buckets 1 or 4. Cannabis sales should continue to march on... And some may actually benefit. Think about this. There are two primary reasons people buy legal cannabis today... Cannabis is used medicinally by many people to alleviate symptoms for a number of illnesses. Second, cannabis is used for recreation in much the same way as alcohol, cigarettes, and other forms of tobacco. Now, you may not believe this... But even in states that only have a medical program, people sometimes stretch the truth about their back pain or anxiety. They do this to gain access to cannabis products legally. (Shhh... don’t tell.) Given these uses of cannabis, two good proxies might be recent alcohol sales and demand for prescription drugs. And both are seeing spiking demand. Americans need their booze... For the third week of March, research firm Nielsen reported that reported that alcohol sales grew 55% versus the same week last year. Even beer, which has been falling out of favor, rose 90% for larger packages (24 and 30 units per package).
Since these communications, a number of the large cannabis companies – both U.S. and Canadian – have reported earnings or specifically published press releases indicating what we concluded above. Curaleaf and Green Thumb, two of the largest U.S. cannabis companies, reported strong earnings for the year and quarter ended December 2019. In their press releases, they went on to make comments about current market conditions and what they are doing to keep sales going. HEXO, a Canadian cannabis company, indicated in late March that it remains fully operational because of its essential status. Of course, all of them have protections in place for employees and customers to stop the spread of COVID-19, like Internet ordering, curbside pickup, and limited in-person sales. Will cannabis sales continue to grow through the COVID-19 crisis? As we think about investing across all sectors of the economy, we can categorize stocks into four buckets: 1. Companies for which 2020 sales will be close to expected (although timing may be impacted). 2. Companies for which 2020 sales will be hurt but will weather the storm because of healthy balance sheets. 3. Financially unstable companies for which 2020 sales will be hurt. There is uncertainty whether these companies will survive into 2021. 4. Lastly, companies that may actually benefit from COVID-19.
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