The great thing about cash stocks is that they are resistant to bear markets. That’s because when things go pear-shaped, there’s always solace to be found at the bottom of the bottle. No one smokes fewer cigarettes in a bear market. In any case, people will smoke and drink more. And they will not necessarily switch to a cheaper substitute. Strong brand loyalty has been a long-standing feature of cigarette markets, with brand loyalty levels ranging from 85 to 90 percent. As for drinkers, the longer you drink, the more loyal you become, the more your liver hates you. The chart below from Statista shows that 40% of American drinkers who have been drinking tea for 10 years or more stick with one brand.
This brings us to hemp. The only way to truly understand this market is to frequent dispensaries and observe what is happening around you. We’ve spent a lot of time on this, so we’re going to use our results to assess how a recession might affect weed stocks – specifically, multi withTate ooperators (MSOs) in the United States.
Bear market in weed stocks
The value of the dollar is rising today, while the value of the dollar is falling sharply in the future. That means growth stocks have taken a hit across the board, and cannabis stocks are no exception. Largest Marijuana ETF by Assets Under Management – ETF AdvisorShares Pure US Cannabis (MSOS) – fell 54% year-to-date compared to the Nasdaq’s loss 21% over the same period of time. As a result, the largest supply of weed fell on his chin.
|Name of the asset||Return from the beginning of the year|
|Green Thumb Industries||-58%|
We only invested in one cannabis stock to have a dog in the race. This is a very small position and this article was prompted by our desire to add a few more stocks. But first we must consider whether our thesis has changed current bear market. Will we top up our already small position, or will we decide that cannabis has become too risky for our risk-averse tastes? It all depends on how we expect the cannabis user to behave in times of economic disaster.
If you give people too many choices, they can’t make a decision. This is a psychological phenomenon known as “choice overload,” and that’s what you’ll encounter when you walk into most cannabis dispensaries. The number of items on display is huge, and that’s when your buddy will direct you to whatever brand their friend is trying to sell, and then you’ll show your appreciation with a tip. To avoid choice overload, people will choose a particular product and show some loyalty to it as long as they can afford it. In tough times, we believe most cannabis consumers will be price sensitive. That is, they will use price as a key factor in their purchase. Not only is this based on our own field research in the legal and black markets, it is also backed up by relevant academic research such as this one.
The above article reviewed twenty studies that measured price elasticity, and most of the studies found that demand was price is inelastic (demand is said to be inelastic if the demand for a good or service remains the same even when the price changes). Research shows that consumers will look for the cheapest unregulated marijuana to avoid a reduction in consumption, and price will be their main factor in purchasing. This is intuitive when you consider that heavy users of cannabis are people who spend a significant part of their income on devil’s lettuce.
Few users consume most of the marijuana used in the United States, with two-thirds of all users smoking this marijuana daily. That’s it massive study published in the Journal of Drug Issues, which took place over a decade and noted that Americans of all ages with a household income of less than $20,000 accounted for 29% of all marijuana use and 27% of all cigarette use. (Compared to only 13% of all alcohol use and 19% of the total adult population.) When times get tough, there are always ways to keep your habit going while spending the same amount of income. A good example Rick Simpson oil (RSO).
Incredible food products
To demonstrate the dramatic price swings seen in cannabis dispensaries, we’ll use the example of food products. If you haven’t tried them, you should. A typical dose is 10mg, which creates a mild high that helps you research your tech investments more effectively – or so we’re told. Our benchmark is to ideally pay no more than $1.50 per dose, which means that a typical 100mg nutritional package will set you back $15. That number used to be $10, but these days it’s getting harder and harder to find products for $15 outside of sales. At a random Washington dispensary this week, we found nutritional prices ranging from $17 to $35 per 100 mg. Most people who purchase these products don’t realize how cheap they can be if you think outside the box.
Most of the dispensaries we’ve been to have the product under the name Rick Simpson Oil (RSO), which is 1,000 mg of pure extract, which costs between $18 and $36 per vial.
That’s between 18 and 36 cents per 10 mg dose. Just squeeze an amount about half the size of a grain of rice onto something edible and eat. This is just one example of how cannabis users can save money during tough times. Another way is to buy weed on the black market.
The threat of the black market
KQED published eye opening article in January, which said it was nearly impossible for California growers to operate profitably because the price of cannabis buds had fallen more than 70% and taxes in some areas were approaching 50%. Customers are finding much better deals on the black market, and some argue that legalized cannabis is subsidized by the black market. Since the industry lacks a strict system of control, it is quite easy for manufacturers to transfer their products to the black market, while selling a minority of their products to legal dispensaries. Some pharmacies sell up to 90% of their harvest on the black market, the article says. With California becoming the first state to legalize cannabis, perhaps this is a harbinger of things to come in other states.
As people’s incomes decline, they will seek the cheapest high-end. All of these high-margin edibles won’t look as appealing, and many of the popular black market strains rival, if not surpass, what’s available in dispensaries. Also note that the novelty of cannabis dispensaries and their 700 different products on offer will disappear as customers go back to the good old black market where everything was cheaper and much easier. For those who smoke daily, the biggest challenge was getting a whiff. This is no longer a problem, which means they are likely to smoke even more – if they can afford it.
There are several implications from what we have discussed today. first of all vertical integration will be critical for multi-state operators to compete on price. Owning the entire supply chain will allow them to reduce profitability while still being able to run a profitable business (one hope). Focusing on one state and then capturing a larger market share will also reduce competitive pressure and allow for economies of scale.
After the dust settles from acquisition frenzy that have taken place over the past few years, the focus will be on operational excellence, which simply means building a model dispensary and then duplicating it across all locations. A key metric for hemp investors to watch is “same store sales,” which will show how the current recession is affecting the shopping habits of hemp consumers, as well as “gross profit,” which shows that MSOs can operate as profitable businesses in tough times.
Cannabis stocks may not be as resilient as other sin stocks if consumers are as price sensitive as we think they are. Some may revert to their old habits and start buying on the black market. The legalization of cannabis means it’s now much easier to drive around with an ounce of weed you just bought on the black market stored in a container from a legal dispensary. The police do not know where you bought this chronicle. Cannabis is becoming more socially acceptable and the black market is doing better than ever. Investors should watch for a squeeze on gross margins and a drop in same-store sales, which would indicate that consumers are indeed becoming more price-sensitive as times get tougher.
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