Cannabis stock bubble bursts
Cannabis stock bubble bursts: Image Credit (pixabay)

Some cannabis companies are still rising up. Veritas Farms Inc (OTC: VFRM) has laid the foundations of an empire and is clearly becoming one of the leaders in the cannabis industry.

While there is no official or concrete definition of exactly when the party will end in the cannabis industry, a 50% drop in the Horizons Marijuana Life Sciences ETF (the first ETF to focus on cannabis) in the last six months is a pretty clear indication that something is wrong. The Horizons Marijuana Life Sciences ETF contains more than five dozen cannabis stocks of different sizes, making it a pretty good indicator of industry sentiment and performance.

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Is this proof not enough? In September, only six out of a selection of 59 cannabis stocks rose. In the last twelve months, only three of these stocks have generated a positive return.

  1. The bubble burst was expected

First, investors should note that the bursting of the cannabis bubble has been expected. In the last quarter century, we have seen a number of similar stories. Among them are the Internet, gene sequencing, B2B businesses, blockchain, and 3D printing. In each of these cases, the exaggerated ambitions of companies in these sectors failed, paving the way for severe crashes.

All emerging industries need some time to mature. Yes, even an industry that has been on the black market for decades needs time to mature. Canada was the first country to greenlight cannabis as a consumer product. This means that the country’s government and cannabis investors have to learn a lot in this process, through trial and error. Logically, there are a few problems on the way to success.

Almost since the first day of legalization on October 17, 2018, Canada has been struggling with supply shortages. This situation was exacerbated by the fact that the Canadian Ministry of Health struggled to cope with the sheer number of applications for cultivation and distribution licenses.

Meanwhile in the US, high tax rates in certain states (for example in California) have hampered the growth of the legal industry and consumers turned back to the black market.

  1. The long-term growth path for cannabis continues to exist

The second thing to consider is that the long-term growth prospects of the cannabis industry are still intact. The supply problems and license backlogs are solvable problems.

Some Wall Street growth projections are absolutely bombastic for the industry. The lower end of the range suggests that global cannabis sales will be around $50 billion by the end of the next decade. The investment house Stifel even expects global cannabis-related spending to reach $200 billion in this timeframe. To give you some context, global sales in 2018 were just $10.9 billion. The average annual growth rate for legal cannabis products could be up to 27%, if Stifel is right with its assumptions.

Also keep in mind that the US will make a significant contribution to this market volume. The US is expected to account for a third or even half of global pot sales in 2030.

  1. The next leaders of the cannabis market

Finally (this may be an unpopular opinion) investors should realize that it is far too early to know the long-term winners and market leaders in the cannabis industry. History teaches us that some of the biggest long-term winners in Next Big Thing industries may still be small caps. This means that big names like Canopy Growth are not necessarily the best investments in the cannabis industry.

So what should you focus on as a cannabis investor? While a lot of companies will be discarded as the industry matures, it might be a smart approach to invest in small caps that have clear competitive advantages.

For example, Veritas Farms, a cannabis producer and distributor from the US shows that the cannabis industry still has great potential. Veritas Farms Inc (OTC: VFRM) experienced impressive growth in the last year. In Q2 2019 Veritas generated more than $2.9 million in total revenue, a 500% increase since Q2 2018. Its gross profits reached $1,523,413 and thanks to great results, it managed to reduce liabilities by over $1.3 million.

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Veritas focuses on transparency and on offering high-quality products. That is why the company released a QR code packaging which can be used by clients to check the quality of the products Veritas sells. All its nine product categories, including gummies, lotions, tinctures and vegan capsules, come from Veritas own industrial hemp farm and facility located in Pueblo, Colorado.

Small cap stocks are a riskier choice for investors, but by getting in early on stocks that have strong fundamentals, like Veritas, there is significant opportunity for growth and long-term profit.