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Meanwhile, the steady march toward legalization has fueled remarkable growth in the cannabis sector over the last several years. While the outlook on cannabis remains bullish, many wonder how this emerging sector will respond to a major economic downturn.

Will the steady stream of retail capital, venture capital and private equity funds spurring cannabis industry growth dry up and bring expansion to a shuddering halt? Or will the cannabis industry – and individual cannabis private and public companies – demonstrate the historical counter-cyclical behavior we’ve come to expect from ”vice” industries, such as alcohol and tobacco?

Likelihood of a recession

The experts can argue about the severity and the timing, but – on the heels of an extraordinary 10-plus years of economic growth and stability – most agree that it is at least wise to prepare for a significant slowdown. Portfolio adjustments are probably in order, as prepared investors will start considering bonds, dividends, stability and commingled accounts.

It is also time to start thinking about defensive stocks – and add cannabis and cannabis-related equities to those considerations. If you have an option to invest through private markets, those opportunities may hold a key to more value, albeit with slightly less transparency to the public market.

Alcohol and tobacco’s recession track record

Clearly, the cannabis industry has never encountered a recession and as such, we can’t revisit history and cite earlier performance, milestones to watch or other informative data.

We can, however, note that the industry would enter a recession with what arguably appears to be very strong fundamentals. According to one report:

• 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.

Additionally, the industry got an important kicker in 2018, when passage of the U.S. Farm Bill made hemp legal nationwide.

It can also be insightful to go back and review the performance of comparable industries, in this case we will examine “vice” industries, specifically alcohol and tobacco. All have track records that provide at least some degree of visibility of what we might expect from cannabis.

The alcohol/tobacco example that followed the recent Great Recession is particularly informative. Consider (information compiled by financial information company Sageworks):

• In 2008, the first full year of the Great Recession, alcohol sales increased 9% and the average unemployment rate was 5.8%.
• 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%.

Takeaway: Consumers cut back on a great number of things when the economy turned, but drinking was not one of them.

Lessons (and non-lessons) learned from individual stocks

Are there lessons to be learned by the performances of some of the individual stocks during and immediately following the Great Recession?

Yes and no.

Anheuser-Busch Inbev (NYSE: BUD) delivered a 39.4% return in 2008, which was nearly 80% better than the S&P 500. Revenue, however, climbed just 5%. The strong performance was not based on financial performance but, rather Anheuser-Busch’s acquisition by Inbev.

Lesson: Undervalued companies with market share will get noticed.
Shares of Altria (NYSE:MO) the parent company of Marlboro among other brands, gained 28% between December 2007 and December 2010. In the middle of that period (2009), the National Institutes of Health (NIH) put out a paper stating that smokers actually increased their cigarette intake during a period of economic difficulty.

Lesson: Price increases can offset weak sales. Brand power has value. Dividends are important in downturns.

Molson Coors (NYSE:TAP) is an interesting example, as the company’s “average-Joe” brand was overwhelmed by craft beers in the Great Recession. Example: the share price of The Boston Beer Co. Inc. (NYSE:SAM) advanced 80%. The issue has since been rectified, with numerous acquisitions, including Blue Moon, Leinenkugel, Hop Valley and Revolver. (Sidebar: Molson Coors, like Constellation (NYSE:STZ) before it with its acquisition of Canopy Growth (NYSE:CGC), also has a deal with cannabis company Hexo (NYSE:HEXO) to develop non-alcoholic cannabis-infused drinks in Canada.

Lesson: Consumers seek out “stress relievers” during stressful times. People with a little extra disposable income will consume products at the higher end of the pecking order.

Diageo (NYSE:DEO) is a global juggernaut, with a huge portfolio of brands, including Johnnie Walker, Smirnoff, Captain Morgan, Ketel One, and Guinness beer. The company continued to be highly profitable during the Great Recession, dropped a bit the next year and then more than recovered in 2011. Their dividend payout ratio is just over 50%.

Lesson: Brand power stays strong during a downturn.

Other factors to consider

There are a number of intangible differences across the cannabis industry that also need to be considered in any analysis:

• Illicit Market, Red Ink? – One major difference between cannabis and alcohol/tobacco is that in a recession the cannabis industry would still have to deal with the competitive pressures and potential price cutting of the illicit market. As an economic downturn puts pressure on consumers’ wallets, we could see a resurgence in illicit market offerings, cutting into legal profits.
• Strong Medical Tailwind – The cannabis industry really is two distinct sectors: adult-use and medical, and the differences are profound. As stated in the Cannabis Private Investment Review, the adult-use market is broader and has long-term growth potential, but the medical market has a number of strong characteristics. For example, U.S. public opinion is overwhelmingly in favor of medical cannabis; ample models of successful regulatory programs; the progress of medical cannabis at the pharmacological level, and the FDA’s 2018 approval of the first CBD-based medicine, are clearing the path for further de-scheduling of cannabis compounds.
• Mature Support Sectors In Place – The opportunity for cannabis investors extends beyond the well-known cultivation, manufacturing and distribution brands. Companies focused on research and development, accessory products, services, publishing and software all have carved out positions as well. In a recession, certain sectors may decline, but the diverse array of companies representing the cannabis industry could produce a mixed bag of winners and losers, evening out the industry’s performance as a whole, or even floating poor-performing sectors.
• Lawyers. Bankers. Politicians – Right now, the future of cannabis as a legal and regulated industry appears more promising than at any previous point as industry growth is being stimulated on several fronts. Doctors are beginning to embrace the medicinal value of cannabis and they are incorporating it into their practices. This is also supported by new efforts to enhance research and development throughout the US and internationally. Lawyers are pushing for legalization in jurisdiction after jurisdiction. Investment bankers and Venture Capital and Private Equity firms are stimulating a flow of needed capital. And even politicians are seeing that legalization is in their best interests.

One more consideration

Finally, there are some market watchers who believe the bull case for cannabis in a recession has almost nothing to do with the burgeoning industry being counter-cyclical, recession-proof or recession-resistant. Instead, they assert, the strong performance will be driven by economics, politics, balancing budgets and generating tax revenues.

Scenario: The prohibition remains at the federal level once the next recession hits. The economic downturn acts as a major catalyst for cannabis legalization at the state and federal levels in the U.S. and abroad. Legislatures will feel pressured to take action – and no jurisdiction will want to be left at the starting line as the others race toward to finish line, creating a possible “domino-effect” scenario.

Bottom line

“Recession-proof” is language that doesn’t belong in investment analysis. However, there is ample reason – based upon fundamentals, the track record of similar sectors and other investment considerations – to conclude that selective cannabis companies and public company stocks could, in fact, be “counter-cyclical” or “recession-resistant.” Accordingly, they should be seriously evaluated as investors consider adjusting their portfolio for a possible economic slowdown.

Currently, cannabis is one of the fastest-growing industries in the world, on the way to generating an estimated $146.4 billion by 2025 (according to Grand View Research). The industry is currently in its early-stages, which can mean that even modest investments now could greatly increase in value 5, 10 or 20 years down the road. As the industry finds its footing on a global scale new investment opportunities emerge every day.

Cannabis does carry lingering social stigmas that may keep investors away. Yet the plant itself is only one facet of a diverse industry that includes everything from “plant-touching” companies to “ancillary” businesses that support the cannabis industry. The following are some of the opportunities tribes and other private investor groups are exploring.

Creating Native-owned cultivation, manufacturing and/or retail operations

As the wave of legalization has slowly but steadily swept across the U.S., the unique sovereignty of Tribal nations has created potential for cannabis business opportunities in communities located in states where recreational-use and/or medicinal cannabis has been legalized.

Investments of this type can take many forms, whether focusing on cultivation, manufacturing, or retail, or the development of a vertically-integrated cannabis operation. This path gives the Tribe complete control over the business.

Leasing Tribal land to cannabis cultivators

In many areas of the country, there are far more aspiring cultivators than there are locations where they can grow. As a result, an emerging trend is the rise of cultivation facilities established by real estate groups or private businesses, which are then leased to cannabis cultivators.

A Tribe looking to invest in cannabis could identify open land or create a greenhouse/indoor cultivation facility that can then be leased to cultivators looking for space. This is an ideal option for Tribal leadership that may not want to take on the operational and legal complexities of cultivating cannabis, but can still benefit from an investment supporting the industry.

Private investment opportunities in cannabis

In recent years a number of leading cannabis companies have gone public, primarily on stock exchanges in Canada, and with a select handful of listed on the NYSE and NASDAQ. The best-in-class producers and retailers represent an intriguing option for private investors. Standard due diligence for purchasing shares of a public company apply equally to the cannabis industry.

Additionally, a number of ancillary companies, those serving the cannabis industry through technology, real estate, or other services, have also gone public and represent a potential investment option. A diverse portfolio that includes a balanced mix of “plant-touching” and “ancillary” businesses could be a low-risk entry into the cannabis industry.

Institutional investment opportunities

As a fast-growing global industry, many cannabis companies are actively searching for capital infusions to expand operations, fund research, launch new products, or enter new markets. There is heated competition for both private venture capital investments, and for institutional investments in newly public cannabis and cannabis-related companies.

Tribal leadership can consider establishing, or investing in, a private equity or venture capital firm and act as an incubator for emerging cannabis businesses. Establishing a fund in conjunction with the other options listed previously could produce a robust cannabis portfolio.

Considering hemp and CBD

While cannabis legalization gets headlines, related products like hemp and CBD are quietly establishing themselves as intriguing industries on their own. The path for growing industrial hemp has recently been opened by federal legislation and the uses of the product are endless. Similarly, CBD has launched a holistic medicine craze, is in great demand for a wide variety of products, and can be derived from non-cannabis sources.

If a Tribe chose to explore hemp and CBD as investment opportunity, they could follow any of the paths illustrated previously and swap out cannabis for hemp or CBD.

Finding the investment mix for your Tribe

The options provided above are just a sample of the opportunities available to investors. There are risks involved with any investment, and cannabis’ complex legal status creates further complications. As result, many traditional investors have been slow to move into the space. But for proactive investor groups, now is the time to get an early foothold in what will soon be a multi-billion dollar global industry.

To help cannabis entrepreneurs and investors keep up with the fast pace of change in the cannabis industry we will be providing monthly summaries of the latest regulatory and legislative news to provide a snapshot of latest happenings while also highlighting matters of interest looking forward.

This month the focus is on prominent federal legislative activity (e.g. the SAFE Act and the STATES Act), state legalization measures (e.g. NJ, NY, IL, and others), and two bills in Colorado that have the potential to attract out-of-state investment to that market.

Changes in federal cannabis legislation

With control of the House of Representatives being transferred to the Democratic party, several bills that have the potential to profoundly impact the cannabis landscape have advanced in Congress.  For example, the last week of March saw the House Financial Services Committee move forward the Secure And Fair Enforcement (SAFE) Banking Act to a full House vote, reportedly “within weeks.” Following the momentum of the House bill, U.S. Sens. Jeff Merkley (D-OR) and Cory Gardner (R-CO) have introduced the companion bill in the Senate.

The latest SAFE iteration addresses the cannabis banking crisis and includes amendments that offer protection to insurance companies and other financial services companies.

The banking issue is long-standing and predates even the implementation of recreational cannabis in the US. The lack of straight forward access to fundamental banking services for the cannabis industry creates a multitude of challenges, most notably the operational and financial difficulties of a multi-billion-dollar industry operating almost entirely in cash. This has obvious implications for public safety and potential diversion to the black market, among other concerns.

The inability to access banking services is often identified as a major hindrance to market entry for large and well-resourced corporations and removal of this barrier could herald a seismic shift in investment into the cannabis industry. At time of writing the House Bill had 152 cosponsors, including 12 Republicans, whereas the Senate bill has 20 co-sponsors.

Adding further momentum to the SAFE bill, last week Last week,  Secretary Steve Mnuchin offered his support for a legislative fix for the banking issues facing the cannabis industry. “There is not a Treasury solution to this. There is not a regulator solution to this,” he said. “If this is something that Congress wants to look at on a bipartisan basis, I’d encourage you to do this.”

Another potentially substantial piece of legislation is the Strengthening the Tenth Amendment Through Entrusting States Act (STATES Act), which aims to reduce conflict between federal and state laws as they relate to cannabis. The STATES Act is a potential gamechanger for the cannabis industry, allowing legal certainty for companies seeking to operate in dozens of jurisdictions across the US.

Although this legislation stalled in December, it was reintroduced on April 4^th, alongside other measures, which include:

• the Ending Federal Marijuana Prohibition Act that would effectively legalize marijuana at the federal level by removing it from the Controlled Substances Act.
• The Marijuana Justice Act of 2019

The extent to which these bills have bipartisan support may be crucial if they are move beyond the House.

Four steps forward and two steps back in state legalization efforts

It has been a mixed month in terms of advancing cannabis legalization measures at the state level. On the one hand, there has been progress in multiple states, such as Connecticut, Illinois, and New Hampshire. While on the other hand there was a couple of snags holding up the implementation of recreational markets in New Jersey and New York.

Recent adult-use cannabis legalization headlines include:

• The New Jersey cannabis legalization bill was pulled due to lack of support although Gov. Murphey (D) reportedly stated he remained committed to getting the bill passed.
• New York dropped cannabis legalization from its budget bill where it was viewed as more likely to pass, however, regulators remain optimistic of progress later in the year. The New York City Council also voted to ban cannabis testing for job applicants.
• A General Law Committee in the Connecticut Legislature approved a bill that would legalize an adult-use cannabis market in the state.
• In New Hampshire, the House Ways and Means Committee approved a vote on the floor on legislation that would legalize an adult-use cannabis market.
• A bill to legalize retail cannabis in Illinois was introduced and passed to a subcommittee for further consideration.
• Governor of Guam signed a bill legalizing cannabis, becoming the first US territory to do so.

Despite the hiccups outlined above, there is a clear trend towards legal cannabis across the US. Moreover, several states took steps towards expansion or liberalization of their medical cannabis markets. Certainly in the long term, the outlook is optimistic for the cannabis industry on a number of fronts.

Back to the future as Colorado looks to position itself as an investment hub for cannabis

When Colorado became the first state to implement an adult-us cannabis framework in 2014, out of state investment was restricted. This allowed the state to build upon its existing medical cannabis market.

The understandable caution has since been questioned, however, and a Bill offering more flexibility in investment passed both the Colorado House and Senate in 2018, only for then Gov. Hickenlooper to veto it. In 2019, a replacement Bill was introduced and has recently passed its third reading in the House unamended.

As an established market with mature regulations and market stability, Colorado has low-risk potential when compared to emerging markets in other states – although competition is likely to be strong, with ever-thinning margins as prices continue to drop in the state.

Out-of-state investors exploring options in Colorado may be interested in acquiring social consumption licenses in Denver, or seek opportunities for market expansion in the delivery segment of the market. If passed, HB19-1234 would allow licensed dispensaries to offer these services for the first time.