Is Cannabis Recession-Resistant? Will It Need To Be?

By Codie Sanchez, partner at Entourage Effect Capital.

Watching the news today there is no doubt as to why investors are looking for non correlated assets and recession resistant places to put their cash. 

After all who wants to repeat this chart for the month of April 2020?

In an era where short term investments give you negative return and everything else is trading in synchronicity (aka it’s all going down, fast, with even bonds and gold not escaping) there are a few industries that stand in a different sphere. We’d argue that one spot where the grass is greener (get it?)… is cannabis.

We thought we’d turn to history to see the validity behind the argument that cannabis may be a recession resistant asset class. But before we do that, let’s set a sobering note. Our base case is that COVID-19 is going to continue to cause volatility and downside in the near-term, most likely a lot more. We surmise that consumer behavior will be altered from this shift, there will be general demand shocks due to lost wages and fear, and that unemployment and businesses going under will grow especially if we continue past a 45-60 day lock down period. None of this is our unique intel, it is simply to say we are not wearing rose-colored glasses about any of the data coming out on unemployment, eviscerated sales or rippling effects of zero consumption. These are all real and reasonable concerns.

See Also: The Resilience Of Cannabis Amid COVID-19 Volatility: Is Marijuana An Investor Safe-Haven?

However, we continue to stress test our thesis that the cannabis industry (in the right segments and companies) poses one of the best distressed opportunities in the market. For that point review our other article here, which highlights the designation as an essential services industry, the double and triple digit sales growth, the need for anti-anxiety and at home entertainment, and the medicinal aspects of the plant.

Sit on that for a second. This is monumental news, and something that you as a business-savvy reader should be paying strong attention to. The aforementioned numbers suggest what some major names in the industry like Andrew DeAngelo, the co-founder of one of our portfolio companies, Harborside, said:

“Whenever there’s a recession, whenever there’s a war, whenever there’s a natural disaster, people need and want more cannabis, not less cannabis… Harborside did not see any noticeable effects from the last Great Recession and for a certain percentage of the population, weed is just as important as food and toilet paper.” [2]

Leer en Español: La Resiliencia de la Industria del Cannabis en la Pandemia: Un Refugio para Inversores

While we can’t revisit history and cite earlier performances to prove that cannabis is recession resistant, we can, however, note that the industry will enter the coming recession with some pretty impressive growth numbers. According to a report from the Motley Fool: 

• Global consumer cannabis spending is expected to surge 38% in 2019 to $16.9 billion, up from an estimated $12.2 billion in 2018, $9.5 billion in 2017, and $6.9 billion in 2016.
• Compound annual sales growth between 2017 and 2022 is expected to average 26.7%, with $31.3 billion in global marijuana sales expected in 2022 [3].

Beyond fundamentals let’s look at historicals from the similar industries of consumer staples, tobacco and alcohol. Take a look at some of these stats from Sageworks and the graph from MJBizDaily below:

Alcohol: 

• In 2008, the first full year of the Great Recession, alcohol sales increased 9%
• In the 12-month period June 1, 2010-May 31, 2011, alcoholic beverage sales grew 10% in the U.S. and the unemployment rate hit 9.6%.
• Anheuser-Busch Inbev BUD delivered a 39.4% return in 2008, which was nearly 80% better than the S&P 500

Tobacco:

• Shares of Altria MO the parent company of Marlboro among other brands, went up 85% between December 2008 and December 2010, and the National Institutes of Health (NIH) actually put out a paper explaining that smokers increase their cigarette intake during a period of economic difficulty.

Consumer Staples:

• If history is a guide even during recessions consumers still buy staples like food, shampoo and yes, toilet paper. 
• Historically, consumer staples performed the best of any sector during recessions (with the only asset classes beating them being gold and treasuries). 
• When the S&P 500 fell 49% in ‘99, consumer staples were up 1.2%.
• In 2008, the S&P 500 fell 57%, they fell 29% performing the best of any sector.

However, it is important to note that while the cannabis industry is similar to consumer staples, tobacco and alcohol industries, it is not the same. There are medicinal aspects, there are limited states, there are complex supply chains.

It is clear that there are a variety of reasons to conclude that the cannabis industry could indeed be recession resistant. Between its continued revenue despite almost all industries shutting down, strong growth stats, developing popularity as a consumer good, and obvious medicinal need; this high may just be too good for investors to pass up. 

Codie Sanchez, Managing Director at Entourage Effect Capital, the first cannabis-only Private Equity firm that has made over 50 investments in the cannabis industry and has approximately $196MM in assets under management. Prior to the cannabis industry she helped build out and lead First Trust’s $3.5B Latin American investments business, in addition to working in equity analysis, institutional fixed income and ETFs at Goldman Sachs, State Street and Vanguard. She is listed as the Top 25 Most Innovative Leader in Cannabis.

[1] https://www.nytimes.com/article/coronavirus-weed-marijuana.html

[2] https://abcnews.go.com/Health/cannabis-shops-thrive-essential-businesses-coronavirus-pandemic/story?id=69662619

[3] https://www.fool.com/investing/2019/01/20/global-marijuana-sales-to-grow-38-to-169-billion-i.aspx

[4] https://www.fool.com/investing/2019/04/20/is-the-marijuana-industry-recession-proof.aspx

[5] https://poll.qu.edu/national/release-detail?ReleaseID=2604

Lead image by Ilona Szentivanyi. Copyright: Benzinga.

The preceding article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.