Editors Note: This was republished with permission from Bengal Capital.
Last week we looked at cannabis as an emergent consumer staple – something that a significant portion of the population regularly purchases regardless of economic conditions. But cannabis is currently an outlier among consumer staples for two reasons, both of which are potentially significant to investors: growth of state-legal cannabis outpaces even the fastest-growing consumer staples, and the stocks of cannabis companies are much more volatile and are valued differently, than other consumer staples companies.
Most staples tend to have stable, regular demand but also not have very high growth rates – usually, growth rates are not too far off of GDP growth (as people get richer, they might eat more expensive food but are unlikely to suddenly start having three dinners) or population growth (for fairly obvious reasons). But, state-legal cannabis sales are growing much faster currently, and estimated to grow at 19% per year for the next five years straight.
As a multiple of forward earnings, consumer staples companies tend to trade roughly on par with the S&P 500, but at a much higher relative multiple when you factor in the estimated forward growth rate of earnings (the PEG Ratio below, an imperfect measure we are not endorsing but just using as quick shorthand for this article) – investors pay up for the certainty of earnings vs. growth of earnings. Plus, with the stable underlying demand, they tend to be less volatile than other sectors.