Pharmaceuticals (PJP) Won’t Be The Only Sector Hurt By Legal Pot

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June 19, 2017 6:12am NYSE:PJP

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From Bill Hall: In my most recent Money and Markets articles, I’ve put you on the inside track about a rapidly growing, yet mostly still under-the-radar, industry. One that the world’s super-rich are quietly funding with their own money, in pursuit of potentially eye-popping investment returns.

I then told you that industry was the legal cannabis business.

What’s more, I reported that, according to reputable market research, the legal marijuana industry in the U.S. was a $3.4 billion business in 2015. In 2016, this market doubled to $7.1 billion.

Now, two major studies show that legal marijuana sales will top $40 billion in the U.S. over the next five years. That number could surge to $50 billion over the next decade … or sooner.

Marijuana is legal in more than half of the states in the U.S., for medicinal and even recreational use. With marijuana going mainstream, some of corporate America’s most-profitable and high-profile industries are recognizing the threat marijuana poses to their profits.

And they are starting to fight back in a big way …

Last week, you learned that the marijuana industry’s biggest enemy is not the Trump administration or U.S. Attorney General Jeff Sessions.

Rather, it’s the Big Pharma companies like Teva Pharmaceuticals (TEVA), Pfizer (PFE), Johnson & Johnson (JNJ) and Allergan (AGN). Companies with big stakes in the pain-treatment game.

But the legal-pot business faces another formidable foe.

Just like Big Pharma, the booze business is scrambling to protect billions of dollars of its own revenue.

Yes, ironically, that’s the very same industry that made Joe Kennedy Sr. rich. If you’ll remember from my May 26 article, alcohol sales funded the Kennedy family fortune when Prohibition was repealed in the U.S. in the 1930s.

And now, the big players in the alcohol business are beginning to push back on the marijuana legalization initiative.

Here’s why …

If the estimated yearly demand for marijuana is in the right ballpark, then more Americans crave cannabis than cabernet or candy bars.

This puts the potential market for recreational marijuana in the Big Three of America’s vices … trailing only cigarettes and beer, as shown below.

Click image for larger view

The booze business’s paranoia seems to be justified, according to data from well-regarded Wall Street investment research firm Cowen & Co.

That’s because the number of drinkers who also smoke cannabis has increased over the past decade. At the same time, the number of cannabis smokers who drink has declined.

Indeed, Cowen analyst Vivien Azer said the alcohol industry is the group that could lose the most if marijuana is legalized at the federal level.

All told, Cowen estimates that the recreational pot industry will reach $50 billion in sales by 2026.

“There is real risk to alcohol consumption,” Azer said. “If consumers are going to dual use, I would expect that they would moderate their alcohol consumption to accommodate the addition of a second social lubricant.”

“We believe alcohol could be under pressure for the next decade, based on our data analysis covering 80 years of alcohol and 35 years of cannabis incidence in the U.S.,” Azer wrote in a note to clients. “Since 1980, we have seen three distinct substitution cycles between alcohol and cannabis; we are entering another cycle.”

Following on, she noted that during the three most recent cycles of alcohol consumption, there was a “notable inverse correlation with cannabis use.”

Moreover, alcohol consumption in the 18- to 25-year-old demographic has declined for five straight years (through 2015). Meanwhile, marijuana usage has increased.

Here’s a chart that Azer used to make her point …

Click image for larger view

Armed with this information, Cowen recently lowered its rating on Molson Coors (TAP) from “Outperform” to “Market Perform.” It also reduced its TAP price target to $105 from $120, saying the beer company’s sales will suffer due to increasing marijuana use in Canada.

But there’s even more bad news for the booze industry …

Some 27% of beer drinkers said they have already substituted cannabis for beer … or would make that switch if marijuana was legal in their state.

That’s according to a recent report from the Cannabiz Consumer Group (C2G). C2G is a market research firm that specializes in forecasting the impact of cannabis on consumer spending.

C2G says that brewers — who in 2015 sold more than $105 billion worth of beer — stand to lose the most from the trade-off between alcohol and marijuana. Specifically, about $2 billion annually. They also note that wine and hard-spirits sales will be affected.

Ultimately, their research analysts project, “Cannabis will cost beer 7% of its market and create a new $50 billion industry.”

$50 billion is nothing to take for granted!

And with $50 billion at stake, it’s no wonder the alcohol industry has been caught multiple times lobbying to keep pot illegal.

Since it’s likely only a matter of time before consumers decide to “fire one up” instead of “turning one up,” you should consider adding some marijuana stocks to your portfolio.

But with more than 200 marijuana stocks currently available on the publicly traded markets, you’ll need to do your homework, be selective and carefully consider your own risk profile.

The PowerShares Dynamic PharmaceuticalsETF (NYSE:PJP) was unchanged in premarket trading Monday. Year-to-date, PJP has gained 5.57%, versus a 8.55% rise in the benchmark S&P 500 index during the same period.

PJP currently has an ETF Daily News SMART Grade of B (Buy), and is ranked #26 of 36 ETFs in the Health & Biotech ETFs category.

This article is brought to you courtesy of Money And Markets.

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