Why Cannabis Is An Excellent Investment Opportunity In A Challenging Economy

By Jordan Youkilis

For the first time in 40 years, U.S. investors are navigating crushing inflationary pressures as they seek to protect their investments while concerns about recession grow. However, just as there are investment strategies and tactics to deploy during a strong economy, the same holds true during periods of high inflation. One challenge for investors looking to protect or expand their portfolio is determining whether the current inflationary trend is a short-term hiccup or an extended concern. But between ongoing global supply chain delays created by the pandemic and the destabilizing effects of the war in Ukraine, it may be difficult to predict what is coming next.

At its most basic definition, inflation is when the demand for goods exceeds the available supply, creating higher costs and leading to rising interest rates. As costs rise for raw materials and services, pressure increases to raise consumer prices, and the cycle of inflation continues. Despite all these challenges, investors can still find great opportunities–and often in places they might not ordinarily look. 

One place to focus attention during periods of high inflation are emerging sectors that can often be high-growth industries. The cannabis industry is a great example. The industry is mostly focused in the private sector, which has less volatility than the public markets. Plus, the industry is growing rapidly as new markets come online and more products are introduced. This growth is expected to maintain momentum even in the presence of inflation. Additionally – and unlike many other industries – cannabis performed well during the worst months of the pandemic due to its status as an essential business in most states. 

However, no matter the industry or the economic conditions, the traditional signs of a good investment still stand. As always, it is important to know that any investment opportunity is being spearheaded by an experienced management team with high integrity and a focused mission. Does the business have a scalable business model and competitive differentiation that will outlast the competition? And is there a clear pathway for profitability and strong, sustainable margins?

In an inflationary environment, investors should also focus on several other areas: Is the business able to pass on higher costs to end customers? Is there a real competitive differentiation in the company’s products or services? What is the business debt the company is carrying and does it come with a fixed interest rate? Finally, consider whether a business is dependent on human capital whose cost can increase dramatically. These are important questions that can reveal whether an investment opportunity is likely to withstand inflationary pressures.

With all the above conditions satisfied, the allure of a cannabis investment can be very strong during times of economic uncertainty. The industry is still maturing and is in a period of high growth and rapid expansion in the United States. Not only do new markets continue to open, but more new products than ever are being developed. There is an established market for cannabis following decades of illicit sales, and a growing interest from new consumers in new regulated markets. What’s more, the pandemic proved the industry’s resilience and the pace of legalization shows no signs of slowing down – particularly as government budgets become more stressed due to inflation. 

Skittish investors who once expressed caution and skepticism over the newly legal industry are beginning to reconsider their resistance and recognizing the best time to jump onboard may have arrived. The stigma surrounding the plant and the industry has steadily diminished, and there is increasing acceptance of cannabis from the public for medical, wellness and even recreational purposes. Due to the rapid growth of the space, there are increasing numbers of investment opportunities in both plant-touching businesses and ancillary technology and support companies that are not required to hold a cannabis license. Capping off increasing investor enthusiasm is the movement and discussions being conducted from both political parties on the issue of federal cannabis reform. 

At the very moment the cannabis industry is leapfrogging to the mainstream, conditions are ripe that make its appeal even more strong. As investors take steps to protect their portfolios in the coming months, the industry may be perfectly poised to capture their attention.    

Jordan Youkilis is a founding partner at KEY Investment Partners, which provides institutional-quality investment management for the cannabis industry.