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Authored by Mike Sassano
As global stress and market uncertainties remain high during the Russian invasion of Ukraine, investors looking for stability in times of turbulence are turning to sin stocks for their tendency to outperform the broader averages in times of market downturn.
Also known as vice stocks, sin stocks are shares of companies that operate in areas considered to be unethical or unsavory, such as tobacco, alcohol, adult entertainment, defense industries, and most recently, cannabis. Traditionally, sin stocks are considered to be fairly recession-proof because people tend to smoke, drink, and gamble in both good times and bad.
Sin stocks show a substantially higher return than the market in general and are particularly resilient in times of economic turbulence. That is why many investors consider sin stocks to be a defensive investment, as there is some immunity from downside risk amid cyclical fluctuations and economic downturns.
The cannabis industry offers a unique opportunity among sin stocks to provide stability and promising results. Here are three reasons why cannabis is well-poised among sin stocks to be the best choice for investing during uncertain times:
- Consumer Demand for Cannabis Is Increasing
Consumer demand for cannabis grew during the pandemic, and the momentum behind the industry is building. As more states legalize medical and adult-use cannabis, barriers to access and research continue to resolve.
Cultural acceptance of cannabis is increasing along with consumer demand. A growing consensus among medical professionals supports the use of medical cannabis for treating a variety of health conditions, from pain to Alzheimer’s disease.
Drug approvals for new cannabis-based pharmaceutical products, including Sativex, Epidiolex, and Nabilone, are paving the way for greater innovation and research investment in studies and trials for cannabis-based treatment. A recent study made headlines when it found that cannabidiol (CBD) has shown potential for treatment and prevention of COVID-19 by potently blocking replication of the virus in the lungs.
Innovations in dosing technology create new opportunities for expansion in the medical market. Advancements in synthetic cannabinoid development and medical-grade pharmacological applications of cannabis give the industry a uniquely positive ethical distinction among sin stocks that will only grow with time.
- Despite No Federal Regulation the Cannabis Sector Self-Corrects
Cannabis remains classified as a Schedule I controlled substance under the Controlled Substances Act at the federal level, but with continued state-level legalization, broad cultural support, and bipartisan backing, optimism is growing for federal legalization. Federal legalization will be a long-awaited key factor in the removal of legal and regulatory barriers to scientific research of cannabis. Most large banks refuse to lend to cannabis entrepreneurs due to federal legislation, although smaller institutions are gaining confidence. Legalization at the federal level will open barriers to cannabis entrepreneurs for traditional sources of capital and institutional investors such as hedge funds and pensions.
The legal cannabis industry is not old enough to have been through major market corrections such as the 2008 banking crisis. Despite its infancy as an industry and the changing regulatory status, the cannabis market has already self-corrected four times in the past eight years. Now cannabis stock valuations are trading at two times EV/NTM sales, making cannabis an exceptional choice for investors among any other sector.
- Regional Cannabis Markets Are Less Impacted by International Issues
During times of global stress, it makes sense to look to cannabis as an investment that is less affected by global issues. Differing state-by-state regulations in the current regulatory environment keep American cannabis markets local, in effect creating regional circular economies which can reduce costs and improve sustainability.
The unfolding turmoil in Ukraine and resulting repercussions on energy markets will be a key indicator for investors. The cannabis community has already been ahead of other industries in sustainability and should be less impacted than other markets by rising oil prices and international issues. Cannabis is uniquely poised to create environmentally sustainable practices as an industry standard from inception.
How To Invest in Cannabis Vice Stocks
Cannabis industry valuations are at all-time highs, and multi-state operators (MSOs) are growing into profitable entities. Even in a federally illegal environment, MSOs have shown robust performance and are an attractive option for investors searching for individual stocks.
Investors looking to carry less risk than individual stocks may want to look toward cannabis exchange-traded funds (ETFs), spreading risk among different aspects of the industry from product conception to consumption.
Increasing consumer demand, momentum in removing regulatory and legal hurdles, and increasing scientific and medical applications poise cannabis as unique among sin stocks for its potential for growth during times of global uncertainty. Investors looking for sin stocks as a safer investment during turbulent times should look to the cannabis market for its marked differences.
Authored by Mike Sassano
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