Is the Marijuana Industry Recession-Proof?
For the past decade or so, the green flag has been waving on the legal marijuana industry. What had once been a taboo topic that was swept under the rug by legislators is now very much considered a fast-paced industry. As we look at the legal landscape today, Canada allows recreational marijuana, Mexico has OK'd medical pot, and 33 U.S. states now have medical marijuana laws firmly on their books. In other words, marijuana has turned into a big-money business.
Last year, global weed sales hit $12.2 billion, with the duo of Arcview Market Research and BDS Analytics calling for $16.9 billion in global sales in 2019, and a doubling of sales by 2022 to $31.3 billion. And based on the rapid rise in the share price of marijuana stocks, money is actively flowing into the industry. Everything, along with stronger-than-expected GDP growth throughout much of North America, has favored the green rush.
Image source: Getty Images.
But economic slowdowns, and even recessions, are an inevitable part of the economic cycle. The United States is currently in the midst of one of its longest economic expansions since the Civil War, but there's the very real possibility that we're in later innings of this expansion than most folks realize.
This raises the question: Is the marijuana industry recession-proof?
How resilient is the cannabis industry?
The answer, I'd contend, is no; but that's only based on the technicality that no industry or business is entirely recession-proof. Rather, the marijuana industry does look to be highly recession-resistant, and there are quite a few reasons this thesis can be backed up.
To begin with, we can look at evidence from other vice industries, including tobacco and alcohol, to make assumptions about cannabis purchases during an economic downturn.
According to financial information company Sageworks, as reported by CNN Money, alcoholic beverage sales grew by 10% in the U.S. in the trailing 12-month period between June 1, 2010, and May 31, 2011. This period, following the steepest recession in seven decades, featured an average unemployment rate of 9.3%. Sales of alcohol also expanded 9% in 2008, the first full year of the Great Recession, when the average unemployment rate was a much lower 5.8%. While it's true that consumers may change how they purchase alcohol (i.e., going out less and drinking at home more), the takeaway is that consumers continue to drink, regardless of the economy.
Image source: Getty Images.
To build on this point, vice products tend to have some addictive qualities to them, which makes it less likely that consumers will abandon these products cold turkey during a recession. It also makes it much easier for vice companies to pass along price increases to grow sales.
For instance, even though cigarette shipping volumes have been falling precipitously for years in the U.S., and the adult cigarette smoking rate recently hit a more than 50-year low, top-line sales for Altria have grown modestly since 2014. That's because tobacco companies, along with other vice stocks, tend to have strong pricing power due to the addictive nature of their products.
According to the National Institute on Drug Abuse, up to 30% of cannabis users are believed to have marijuana-use disorder, which is when people can't stop using the drug even though it interferes with numerous aspects of their life. This addictive quality suggests that while consumers might trade down from average dried flower to discount flower, they'll still be consuming cannabis.
The timing of a recession will also have a lot of bearing on how well the marijuana industry performs. With most of the industry still nascent, and legalizations popping up pretty regularly around the world and at the state level in the U.S., new market opportunities could likely transcend any localized, or even global, economic weakness. This is especially true in the U.S., where bipartisan support for the drug is budding like never before.
Image source: Getty Images.
These pot stocks are especially recession-resistant
But, as you might imagine, some marijuana stocks have a leg up on others in terms of recession resistance.
Although it's very possible that consumers might opt to trade down to cheaper dried cannabis flower during a recession, this most likely isn't the case for Flowr Corporation (NASDAQOTH: FLWPF), a midtier grower that's focused on producing only ultra-premium cannabis. From what we've seen in the early stages of legalization in Canada, and throughout the select few recreationally legal U.S. states, average and discount marijuana proliferate. This suggests there's no concern of oversupply or pricing pressure on premium and ultra-premium cannabis.
Furthermore, Flowr's core customer is a more affluent weed user who is far less likely to be hurt by fluctuations in the local or global economy. Even though Flowr's 60,000 kilos of peak production at its Kelowna campus in British Columbia pales in comparison with a number of Canadian growers, this is an instance of quality trumping quantity, and it should lead to impressive operating results over the long term.
Another particularly recession-resistant marijuana stock is ancillary player KushCo Holdings (NASDAQOTH: KSHB). KushCo primarily provides packaging and branding solutions to more than 5,000 pot growers worldwide. The simple fact that it has accounts in 25 countries provides geographic diversity and minimizes any potential pushback it might contend with if a recession struck North America.
In addition, KushCo provides hydrocarbon gases and solvents for the respective production of cannabis oils and concentrates. Alternative pot products are particularly popular with medical marijuana patients. According to the fourth-quarter National Cannabis Survey, medical weed patients use marijuana more often, buy pot more frequently, and are much more likely than recreational patients to buy high-margin oils and concentrates.
Image source: GW Pharmaceuticals.
Presumably, GW Pharmaceuticals (NASDAQ: GWPH) should also be very recession-resistant. GW Pharmaceuticals is the first drug developer to have had a cannabis-derived drug approved by the Food and Drug Administration. Epidiolex, a cannabidiol-based oral therapy, wowed in late-stage trials for two rare types of childhood-onset epilepsy, reducing seizure frequency by roughly 30% to 40% from baseline, and running circles around the placebo in the process. It's no wonder that the FDA's panel unanimously recommended it for approval.
Although Epidiolex has a costly list price of $32,500, GW Pharmaceuticals has done well in securing insurance coverage for its lead drug. What's more, it's the only FDA-approved treatment for Dravet syndrome, which is one of the two approved indications. Since people can't determine when they get sick or what ailment they develop, GW Pharmaceuticals is unlikely to be hurt by a U.S. or global recession.
Marijuana may not be recession-proof, but it's pretty darn close to it. That makes it an industry to put on your radar.
More From The Motley Fool
- Beginner's Guide to Investing in Marijuana Stocks
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Sean Williams has no position in any of the stocks mentioned. The Motley Fool recommends KushCo Holdings. The Motley Fool has a disclosure policy.