Updated: Dec 31, 2021
The market for Cannabis stocks and ETFs has been bumpy for years. There was a surge in the value of many cannabis companies in late 2017, and it has been a roller-coaster ever since. Many of these companies, however, are undervalued and an excellent investment. In my portfolio, I have a 0.71% stake in $TLRY (Tilray, Inc.), which is up 26.76% YTD and is the third-largest Canadian cannabis stock. The company sells cannabis, oil drops and vape pens. In 2020, their net revenue climbed 43%, and its merger with Aphria in December of 2020 helped the Toronto-based company achieve $55 million in cost savings to date. In October 2018, Canada legalized the sale of non-medical cannabis. Since then, the Canadian cannabis market has been proliferating. In 2020, overall sales in the country rose 120% YoY and reached $2.08 billion. As the market scales, more companies are vying for a share. Despite high levels of M&A, the top five licensed producers represented less than 40% of the Canadian market in August, down 10% from a year ago.
The American cannabis market has been hot as well. Medical cannabis is legal in 37 states, and recreational cannabis is legal in 18 states. In July, U.S. Senate Majority Leader Chuck Schumer and Senators Ron Wyden and Cory Booker introduced draft legislation to legalize cannabis federally. Although this measure is unlikely to pass, the U.S. is getting closer to federally legalizing cannabis and having market conditions similar to Canada’s. The U.S. considers cannabis a schedule 1 controlled substance which makes it ineligible for federal tax deductions, prevents institutional investors from taking a stake because of “vice clauses,” and hurts access to intellectual property protections. That said, U.S. retail cannabis sales rose roughly 40% in 2020 as New Jersey, Montana, South Dakota, and Arizona made recreational use legal. In 2021, New York, Virginia, New Mexico, and Connecticut recreationally legalized it as well.
$MJ is the largest cannabis ETF in the world and the first and only U.S.-listed ETF to invest in the global cannabis industry directly. The ETF, which has an 8.97% stake in Tilray, has returned 36.58% over the past year. It exceeded $1 billion in assets under management in December of 2020. I am bullish on the 3-5 year horizon for cannabis stocks, and America is an up-and-coming market. In January 2020, legal cannabis became the fastest-growing industry in America, with over 243,700 jobs, a 15% increase YoY. Further, large-cap stocks with cannabis exposure are becoming increasingly common, with players like $MO (Altria Group Inc) entering the market and taking substantial stakes in firms such as $CRON (Cronos Group Inc) , the seventh-largest cannabis stock with a market cap of $2.045 billion and returns of 1.09% in the past 52 weeks. Additionally, there is room for growth in the Canadian market. Ontario announced this month that they want to permanently allow cannabis retailers to do delivery and curbside pick-up. The global reach of Canadian cannabis companies is also increasing, with companies like $ACB (Aurora Cannabis Inc), which has a market cap of $1.473 billion, exporting $8 million worth of medical cannabis to France, Germany, and Israel last quarter. Many Canadian companies, including Canopy Growth, which was at one point the largest cannabis stock in the world, are optimistic about the prospects of entering the U.S. market at some point during the Biden administration.
Most cannabis ETFs are passively managed, and many have underperformed in recent years. However, the industry is primed for significant gains globally over the next few years. There are many undervalued cannabis stocks and understanding the legislative playing field is crucial to understanding the growth potential of these investments. The illicit market for cannabis in America alone is reported to be around $50 billion. Federal legalization would represent a massive investment opportunity. Legislation is in the pipeline to expand the cannabis market in America, with Canada expanding domestic capabilities and potentially setting up cross-border operations.
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