From the “Captain Obvious” department: Statistics show that marijuana sales have spiked over the past few weeks, and it appears that, unlike toilet paper and hand sanitizer, the sales increases are not just the result of users hoarding while expecting weeks or even months of isolation. Investors who once embraced the marijuana industry just a couple of years ago have all but abandoned it, despite statistics that show growing overall use.

In an interesting and very solid report from Alliance Global Partners, analyst Aaron Grey makes the case that while the industry has been very volatile, the numbers are trending higher. This was noted in the report:

The coronavirus (aka COVID-19) continues to impact the US and world, disrupting everyday life. Within this disruption, cannabis sales spiked the past few weeks according to multiple data providers & companies. We believe this points to the resiliency of cannabis and goes deeper than just consumers hoarding product in anticipation of a prolonged period of isolation. We see this as pointing to the staying power and importance of the industry as many states have deemed cannabis business “essential” despite thousands of federal legal businesses being shut down. That said, we still see high risk to specific companies during this period, particularly those who may need to tap the capital markets in the near-term.

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The mere fact that some states and localities have deemed that marijuana dispensaries are among the companies in the “essential business” category, which allows them to remain in operation during some lock-downs, is indeed a sign of growing acceptance. The Alliance Global team feels that this eventually could help with the federal legalization efforts.

Not exactly sure of the status of cannabis? Marijuana is currently legal for recreational use in Alaska, California, Colorado, Massachusetts, Maine, Michigan, Nevada, Oregon, Vermont, Washington and the District of Columbia. On January, 1, 2020, Illinois became the 11th state to legalize recreational marijuana.

In addition, at the end of 2019, a poll done by CBS indicated that support for legal pot hit a new high in 2019, with two-thirds of adults polled saying marijuana should be legal. In addition, for the first time in CBS News polling history, a majority of Republicans (56%) favored legal marijuana. While people ages 65 and over continued to be the least likely age group to support marijuana legalization, slightly more of them favored it (49%) than opposed it (45%) in that poll.

It should be noted that while states have made the recreational use of pot legal, it is still illegal on a federal basis. Therefore it remains a cash-driven business as dispensaries around the United States only take cash or debit cards. The Alliance Global report notes that making pot an essential business at the state level shows the disconnect between state and federal law and could help drive a reassessment of legality, or at the minimum, permissibly at the federal level in the coming months and years.

In states like California, some dispensaries actually take orders from customers off of an online menu, and the products, whether of the leaf, vape or edible variety, are actually ordered and delivered like pizza is. The report noted this when discussing the increase in deliveries:

Google Trends data shows that searches for “Cannabis Deliveries” has more than doubled from levels in January. While we do not believe these levels will hold over time, we do believe this could help to accelerate the growth of cannabis delivery, which has already been increasing over the past five-years per Google Trends. That said, delays caused from high demand could increase the wait times beyond the norm (as many sites have indicated). This likely makes the consumer experience not as optimal as it would be during a normal course of business – which could impact repeat delivery purchases when we do get back to a sense of normalcy, in our opinion.

Ultimately, the key for the industry is simple. Cannabis legalization at the federal level would open the floodgates for everything from financing to purchasing, and so much more, for the industry. The Alliance Global analyst, like others that cover the industry, spotlighted how crucial the change would be:

To be clear, we are not making the case that the impact from the Coronavirus will push for cannabis legalization at the federal level in 2020 or even 2021. However, we do believe that this has only further emphasized the importance of cannabis in today’s society and the need to reconcile differences in state and federal laws. Thousands of businesses have been shut down, but some cities and states have deemed cannabis “essential”, and we believe it only makes sense that such an “essential” part of society (especially medical) not be considered breaking federal law. Today, cannabis firms could have difficulty accessing federal assistance as they are not federally legal businesses – despite the fact these are state legal businesses subject to federal tax, Instead businesses, and more importantly workers, are left with greater uncertainty in-terms of federal relief for business and its workers during this time. That said, we still believe there are a number of issues to resolve before we see federal cannabis being legal or permissible. We still see a higher likelihood of a bill such as the SAFE Act (legalize cannabis depository banking) before the STATES Act (federal legal within states where legal), and do not see full federal legalization occurring in the near-future. However, we believe this pandemic has only helped the case for eventual federal legality/permissibly.

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We searched through the wreckage of the cannabis stocks looking for ideas that make sense for investors and found two that look like solid picks. Note that these are only suitable for very risk-tolerant accounts.

Aphria

This is one of the only marijuana companies that actually isn’t losing money constantly. Aphria Inc. (NASDAQ: APHA) engages in the production and supply of medical cannabis. It operates through the following segments.

The Cannabis Operations segment produces, distributes and sells both medical and adult-use cannabis. The Distribution Operations segment’s operations are carried out through its wholly owned subsidiaries: ABP, FL Group and CC Pharma. The Business Under Development segment includes operations in which the firm has not received final licensing or has not commenced commercial sales from operations.

The Alliance Global report notes that the company had $500 million Canadian on the balance sheet as of November 2019, and an additional $100 million Canadian raised from a strategic investor. Additionally, the company has reported positive adjusted EBITDA in the past three quarters, while most of the large companies continue to report notable losses. The firm rates the stock a Buy, but no price target was available.

Merrill Lynch also has a Buy rating, along with a $3.44 price target. A Wall Street consensus price target was not available. The shares closed trading on Monday at $2.54.

Cronus

This company had a major international company take a large position late in 2018. Cronus Group Inc. (NASDAQ: CRON) is a global cannabis company founded in 2012 and based in Ontario, with a presence across five continents. Its principal activities are the production and sale of cannabis and cannabis-derived products in federally legal jurisdictions.

Back in December of 2018 Altria agreed to buy a 45% stake in Cronos for about $1.8 billion, a sign of the new world in which the tobacco companies must compete. This strategic partnership provides Cronos with additional financial resources, product development and commercialization capabilities, and deep regulatory expertise to better position it to compete, scale and lead the rapidly growing global cannabis industry.

Altria’s investment in Cronos also gives it the option to increase to full ownership if it so chooses down the road.

Merrill Lynch has set a $7.56 price target on the shares, and the stock closed Monday at $5.12.

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It is important for investors to remember that between institutional short and long selling and the general malaise that has fallen over the pot stocks, the opportunity for aggressive accounts could be immense. However, federal legalization could remain in the distance. Yet, if (and many people say it’s a question of when, not if) legalization happens, you can expect some parabolic moves to come back to the sector like in 2018.

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