The COVID-19 pandemic has spawned a natural surge in demand for consumer products to support our health.
Cannabis is already being used medicinally to alleviate a wide assortment of health issues. It is also being used prophylactically, most commonly in the form of CBD dietary supplements. Well positioned for sales growth.
The coronavirus lock-down has also triggered a surge in demand for consumer “vice” products, everything from increased online gambling to a surge in demand for alcohol products.
Cannabis, as a recreational drug, also falls into that category. However, being non-toxic and not physically addictive, it is a relatively benign vice product. Well positioned for sales growth.
For these reasons, it should be no surprise to learn that cannabis sales are growing during the COVID-19 pandemic. This is true even with the reduction in storefront commerce in many jurisdictions.
The latest retail sales numbers from Statistics Canada show this robust demand. Over the first two months of 2020, Canadian cannabis sales are on pace to reach CAD$1.8 billion in 2020. This projects to more than a 50% increase from Canada’s 2019 cannabis sales of ~$1.1 billion.
The Seed Investor pointed to the strength of the cannabis sector in a recent article.
There are several reasons for viewing CBD commerce as being (relatively) sheltered from the economic repercussions of COVID-19. These relate to both the cannabis sector in general, and the CBD sub-sector in particular.
- As an emerging industry, cannabis has virtually zero international trade being disrupted by COVID-19. Rather than facing steep losses of existing revenue streams, the cannabis industry merely faces (COVID-related) delays in opening up these international markets.
- Similarly, the supply chain for the cannabis industry has a very small international trade component. Cannabis (and CBD) operations have minimal vulnerability to supply chain disruptions.
- As both a health supplement and medicine, CBD is relatively immune to the depressionary economic impact of the COVID-19 pandemic. Health-related spending is one of the last areas where people make budget cuts in an economic downturn.
- The intense desire of many/most people to strengthen and fortify their health during the coronavirus pandemic should stimulate CBD demand even further.
Incredibly, cannabis stock valuations haven’t begun to reflect these dynamics.
According to The Marijuana Index, cannabis stocks are trading at greater than 3-year lows. This is true for Canadian cannabis stocks and North America-wide.
Despite the wishful thinking of optimists, the economic disruption from the COVID-19 pandemic is not going to dissipate any time soon. Consumer trends generated during the pandemic will last even longer.
For many sectors (such as hotels and airlines) this is disastrous. For the cannabis sector, it is an additional driver of growth.
Investors have a clear choice. They can put their money into the grossly overvalued stocks of the S&P 500 – temporarily re-inflated by the Federal Reserve’s money-pump.
Or investors can look for value. When it comes to 2020 value opportunities, it’s hard to beat cannabis stocks.