April 20 has become a day of celebration for people who support the full legalization of marijuana – also for recreational use.
However, there is no denying how volatile the cannabis sector can be for investors. Here is a six-month chart showing the total returns for three actively managed exchange-traded funds in the space up to April 19:
(Fact sheet)
Read: Cannabis Bank Account Approved by House
These are striking numbers for any investment in a period of six months. But they also point to wild volatility. All three reached their highest intraday highs on February 10th. Since then, the Amplify Seymour Cannabis ETF CNBS,
decreased by 35%, while the AdvisorShares Pure Cannabis ETF YOLO,
decreased by 34% and the AdvisorShares Pure US Cannabis ETF MSOS,
gave up 29%.
New bank account succeeds at Home
Supportive news came Monday night when the House passed a bill giving cannabis businesses access to the U.S. banking system.
Previously, a lot of good news was praised for the industry. For example, the actual legalization of marijuana in New York State on March 30 – recreational use is now allowed and the legislation does not hide behind lax “decriminalization language” – did not reverse the marijuana’s shares.
An important distinction that investors need to understand is that the five largest Canadian dagga companies are listed on the U.S. stock exchange, but that U.S. producers are listed on the Canadian stock exchange only. Shares of U.S. multistate operators, known as MSOs, are available over-the-counter or on Canadian stock exchanges because marijuana for recreational use is still illegal at the U.S. federal level.
This means that several of the most well-known marijuana companies – the Canadian – cannot sell products in the US, while the MSOs only have free rein in the 16 countries where they have been used legally.
YOLO and MSOS were able to circumvent the problem by keeping the total return swap for the MSOs. And on April 20 – yes, on April 20, the International Day of Marijuana Smoking – Amplify ETFs announced that CNBS would now also be able to buy MSO total yield swaps.
The “four big” MSOs are Curaleaf Holdings Inc. CURLF,
Green Thumb Industries Inc. GTBIF,
Cresco Labs Inc. CRLBF,
and Trulieve Cannabis Corp. TCNNF,
You can see below how favorable the opinion of Wall Street analysts are to the MSOs, while the group has few ‘buy’ ratings for the ‘big five’ Canadian producers: Canopy Growth Corp. CGC,
Aphria Inc. APHA,
Tilray Inc. TLRY,
Cronos Group Inc. CRON,
and Aurora Cannabis Inc. ACB,
Click here for a detailed description of the three ETFs and how they invest in U.S. and Canadian marijuana producers.
Analysts’ opinions
Despite the fact that the US stock market is not held, MSOs have enough coverage among analysts working at brokers. To look beyond the four major MSOs, Dan Ahrens, the portfolio manager of YOLO and MSOS, provided a list of six of “the most important currently”.
One of them, TPCO Holding Corp. GRAMF,
is only covered by two analysts, and is therefore not included in the following list, in which all companies are covered by at least five analysts.
Here’s a summary of opinions on Wall Street analysts for nine MSOS:
(Fact sheet)
The first screen contains only percentages of “buy” or equivalent ratings, as none of the analysts have “sold” or equivalent ratings on any of the MSOs listed. You can see that the sentiment is strong for the American producers.
The rating of ratings differs greatly for the five major Canadian producers:
(Fact sheet)
Forward price-to-sales ratios are shown, rather than price-to-earnings, because companies at such an early growth stage do not focus on discussing profits. For comparison: the forward ratio for the Nasdaq Composite Index COMP,
is 4.2.
Click here for an update on the proposed merger of Aphria Inc. and Tilray Inc.
Read: Why this cannabis giant is betting on Europe to build a war chest before the American legalization bonanza