Marijuana / Cannabis Stocks – Speculation or Growth Sector?

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This article was submitted by a Guest Contributor. If you would like to submit an essay, email [email protected]!

The opinions expressed in this publication are those of the Guest Author/Contributor. They do not purport to reflect the views or opinions of the Financial Horse Team. 


As a growth stock enthusiast, marijuana / cannabis stocks has been a sector I’ve been interested in for a long time.

The roller coaster ride of high volatility stocks is not for the faint hearted, so you really need to believe in what you’re investing in – otherwise #paperhands

While everyone’s estimates as to how much differ, the pot sector is definitely growing. North American pot sales have been estimated to reach $75 billion annually by the end of the decade.

At the same time, the sector is crippled with challenges – from legalization obstacles, black market competition and just plain-old unprofitability and bad business fundamentals.  

Investing in this sector is not for everyone, but for those who are interested, this post will explore some of the recent and interesting developments in the marijuana stocks space – and why cannabis stocks are sky high right now.

  1. Lawmakers are changing their tune – but not quite!

After Trump lost the election, Biden and the Democrat victory led to a rally in cannabis stocks, as there were increased hopes of US federal legalization.

What is the problem? At the moment, the use and sale of marijuana, is still illegal under federal law (despite state laws).

However, more states are voting to legalize some form of marijuana use. A total of 36 states have legalized medical marijuana, with 15 states and Washington DC legalizing cannabis for recreational adult use. In February 2021, Virginia lawmakers approved legislation that would legalize recreational use of marijuana by 2024. This means that Virginia will become the 16th state to legalize recreational adult use.

 

California is the largest US state by population and has been at the forefront of the push towards liberalization of laws. California is the first state to legalize medical cannabis in 1996, and recreational use was legalized in late 2016. The marijuana sector in California is projected to be worth about $7 billion in 2025, up from $2.9 billion in 2019.

Most states which have legalized recreational use, also impose a tax. Marijuana tax revenues are then used to fund states’ initiatives, including education and public health initiatives. However, the additional tax does mean that it is harder to compete with the black market.

Late last year, the United Nations Commission on Narcotic Drugs removed cannabis from its schedule of dangerous drugs. This was great news to the cannabis sector, as it signals greater opportunities for global medical cannabis research and legalization efforts. 

In December 2020, the House passed the MORE Act, a bill to federally decriminalize cannabis. If passed in the Senate, the MORE Act would remove cannabis from the list of controlled substances and allow states to decide how to regulate the drug.

However, there remains a lot to be done before there is a tangible trickledown effect at the ground level, not to mention the mishmash of differing regulations across states that cannabis operators have to deal with – making it tricky to produce and sell across states. 

  1. Canada vs US

Because of the regulatory challenges in the USA, a lot of focus has been on Canadian companies – where recreational use of cannabis was legalized in 2018 (medical cannabis was legalized in 2001).

Canadian cannabis companies are able to list on major stock US exchanges. Major ones include:

  • Aphria Inc
  • Aurora Cannabis Inc
  • Cronos Group Inc
  • Canopy Growth Corp
  • Tilray Inc

As more states vote to legalize cannabis, the hype transfers to the Canadian companies, in the hope that Canadian companies will be able to expand their business into the USA market.

However, many industry insiders caution against over-optimism in Canadian companies, as even if federal legislation passes in the USA, there remains many regulatory hurdles to overcome before Canadian companies can actually sell their product in the US.

This brings us to the largest US companies selling marijuana products across states, known as multistate operators (MSOs):

  • Cresco Labs Inc
  • Curaleaf Holdings Inc
  • Green Thumb Industries Inc
  • Trulieve Cannabis Corp

Trulieve has massive market share in the Florida market, and is growing rapidly. 

Fund manager Bill Miller is a big proponent of Green Thumb Industries Inc. (NYSE: GTBIF), a cannabis consumer packaged goods company that currently has a $7.7 billion market cap. They believe GTBIF is undervalued in terms of their licenses. Licensing is a huge deal for MSOs, who operate across states and have to detangle the messy web of regulations.

  1. Reddit to the rescue

Weed stocks were on fire in February.

Why? In large part due to r/wallstreetbets, weed stocks became the flavour of the month for reddit traders.  

Tilray, Canopy Growth, Aphria, Aurora Cannabis and Sundial Growers saw big spikes in February as WSB traders took on cannabis stocks.  

In particular, Canadian producer & penny stock, Sundial Growers (NASDAQ:SNDL) received a lot of attention, and was one of the most traded stocks on Robinhood.

Share prices tanked sharply after the initial trading frenzy, but share prices are picking back up again.

A Meme demonstrating how volatile Weed stocks are 😉
  1. The many faces of the cannabis industry

The cannabis industry has many faces – and this means more options for investors to get a slice of the pie. There are:

  • Growers
  • Retailers
  • Manufacturers
  • Pharma companies

In addition, there is has been a huge off-shoot with regards to CBD products.

CBD stands for cannabidiol. CBD is derived directly from the hemp plant, which is a cousin of the marijuana plant. CBD is believed to have non-addictive therapeutic benefits, although much of the research is still in the early stages.

CBD has been huge lately, with all sorts of peripheral products launched.

For instance, Canadian pot producer Canopy Growth (CGC) launched a sparkling water with hemp-derived CBD in the US. Tilray (TLRY) owns Manitoba Harvest, which sells hemp granola and other foods.

There are event products like Gym Wear infused with CBD oil. The company infuses its workout clothes like leggings and sports bras with CBD and markets the clothes as a form of “prerecovery” or “proactivewear”.

There is even a market for CBD oil for pets!

  1. Stocks vs. ETFs

How to invest in the cannabis sector?

As earlier mentioned, there are many faces to the cannabis industry, and with it, many ways to invest.

If you are familiar with the industry, you can consider investing directly in stocks. These are some of the largest companies by market cap, according to a Business Insider article.

Company

Market Cap

Type

Canopy Growth Corp (CGC)

$15.86 billion

Grower/Retailer/Drugmaker

Curaleaf (CURLF)

$7.74 billion

Retailer/Drugmaker

GW Pharmaceuticals (GWPH)

$6.77 billion

Drugmaker

Green Thumb Industries Inc (GTBIF)

$6.55 billion

Manufacturer/Retailer

Tilray Inc (TLRY)

$5.49 billion

Drugmaker

Cronos Group (CRON)

$4.70 billion

Manufacturer

Village Farms International, Inc. (VFF)

$1.41 billion

Grower

Source: Business Insider

Canopy Growth Corp (CGC) is one of the leaders in the marijuana space. Canopy Growth was the first federally regulated, licensed, publicly traded cannabis producer in North America, traded on the Toronto Stock Exchange as WEED. It began trading as CGC on the New York Stock Exchange in May 2018 as the first cannabis producer on the NYSE. In August 2018, Constellation Brands announced its investment of an additional USD 3.8 billion in Canopy Growth, giving it 38% ownership of the company. In 2019, there was restructuring in the company, where the current CEO, David Klein, was hired.

Earlier, we mentioned the largest US companies selling marijuana products across states, known as multistate operators (MSOs):

  • Cresco Labs Inc
  • Curaleaf Holdings Inc
  • Green Thumb Industries Inc
  • Trulieve Cannabis Corp

Cresco Labs (OTC:CRLBF) ranks as one of the top MSOs in the U.S. The company operates retail stores in nine states that together comprise 60% of the current addressable market. It’s also the largest wholesaler of branded cannabis products in the country.

Green Thumb (OTC: GTBIF) is another promising company. Fund manager Bill Miller is a proponent of GTBIF stock, and they believe that “GTBIF is undervalued based on their current licenses alone, while state expansion is virtually guaranteed”.

Trulieve (OTCQX:TCNNF) has massive market share in the Florida market, and is growing rapidly. 

There is even a Cannabis REIT!

Innovative Industrial Properties (NYSE:IIPR) focuses on the U.S. medical cannabis industry. It currently owns and leases 67 properties in 17 states. Innovative Industrial Properties, Inc. targets medical-use cannabis facilities for acquisition, including sale-leaseback transactions, with tenants that are licensed growers under long-term, triple-net leases.

What about ETFs?

If holding a basket of shares is more up your alley, investors can also look at ETFs.

ETF

Net Assets

ETFMG Alternative Harvest ETF (MJ)

$1.44 billion

AdvisorShares Pure US Cannabis ETF (MSOS)

$582.68 million

AdvisorShares Pure Cannabis ETF (YOLO)

$265.07 million

The Cannabis ETF (THCX)

$91.59 million

Global X Cannabis ETF (POTX)

$84.36 million

Source: Business Insider

ETFMG Alternative Harvest ETF (MJ), is passively managed and is the oldest cannabis ETF. MJ® tracks the Prime Alternative Harvest Index, designed to measure the performance of companies within the cannabis ecosystem benefitting from global medicinal and recreational cannabis legalization initiatives.

The Cannabis ETF (THCX) offers pure-play exposure to the cannabis industry with a basket of roughly 29 stocks. The fund is passively managed and tracks the Innovation Labs Cannabis Index.

The Global X Cannabis ETF (POTX) seeks to provide investment results that correspond generally to the price and yield performance, before fees and expenses, of the Cannabis Index.

Actively managed ETFs include Pure Cannabis ETF (YOLO) (love the name!) and Amplify Seymour Cannabis ETF (CNBS)YOLO became the first actively managed ETF with a dedicated cannabis investment mandate domiciled in the United States. CNBS is managed by Tim Seymour, a recognized voice and experienced investor in the cannabis space.

Pure US Cannabis ETF (MSOS) is a newer entry, available on NYSE Acra since September 2020. As its name suggests, MSOS is the first and only actively managed US-listed ETF with dedicated cannabis exposure focusing exclusively on US companies, including multi-state operators.

According to this article,  

  • Marijuana ETFs significantly underperformed the broader U.S. equity market over the past year.
  • The ETFs with the best 1-year trailing total return are YOLO, CNBS, and THCX.
  • The top holdings of these ETFs are Village Farms International Inc., GrowGeneration Corp., and Village Farms International.

Concluding thoughts

Despite the huge rally in February this year, I personally don’t plan to sell any of my cannabis stocks. I see this as a long-term play especially as legalization efforts continue to expand in the US markets.

Of course, investing in cannabis stocks is risky and requires your own careful due diligence.

Overall, it’s an extremely interesting sector for growth-oriented investors, and the options for investment are extremely diverse – from companies all throughout the supply chain, to actively-managed pure play ETFs – CBD products and other weed-adjacent industries are also one to watch!

This article was submitted by a Guest Contributor. If you would like to submit an essay, email [email protected]!

The opinions expressed in this publication are those of the Guest Author/Contributor. They do not purport to reflect the views or opinions of the Financial Horse Team. 


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