April 20 has become a holiday for people who support the full legalization of marijuana – including for recreational use.
But 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 publicly traded funds actively managed in space as of April 19:
(FactSet)
Read: The draft banking law on cannabis is approved by the House
These are attractive figures for any investment over a six-month period. But it also indicates wild volatility. All three reached their intraday highs on February 10th. Since then, the CNBS Amplify Seymour Cannabis ETF,
decreased by 35%, while AdvisorShares Pure Cannabis ETF YOLO,
decreased by 34% and AdvisorShares ETF MSOS MS Cannabis in the US,
gave up 29%.
The new bank bill goes to House
Support news came Monday night as the House passed a bill that would allow cannabis businesses access to the US banking system.
Before that, a lot of good news for the industry was evaluated. For example, the actual legalization of marijuana in New York State on March 30 – recreational use is now allowed and the law does not hide behind the flaccid language of “decriminalization” – did not reverse the loss of cannabis stocks.
A critical distinction that investors need to understand is that the top five Canadian marijuana companies are publicly listed on US stock exchanges, but US producers are only listed on Canadian stock exchanges. The actions of operators in several US states, known as MSOs, are available without a prescription or on Canadian stock exchanges, as recreational marijuana is still illegal at the US federal level.
This means that many of the most well-known marijuana companies – the Canadian ones – cannot sell products in the US, while MSOs have free rein only in the 16 states where recreational use has been legalized.
YOLO and MSOS managed to solve this problem by holding total profitability swaps for MSO. And on April 20 – yes, on 4/20, the international day of marijuana smoking – Amplify ETFs announced that CNBS will now be able to buy full MSO return swaps.
MSO’s “big four” 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 is for 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 US and Canadian marijuana manufacturers.
Analysts’ opinions
Despite being kept out of US exchanges, MSOs have a lot of coverage among analysts working for brokerage firms. To look beyond the four major MSOs, Dan Ahrens, portfolio manager for YOLO and MSOS, provided a list of six of the “most significant current ones”.
One of them, TPCO Holding Corp. GRAMF,
it is covered by only two analysts, so it is not included in the following list, in which all companies are covered by at least five analysts.
Here is a summary of the opinions among Wall Street analysts for the new MSOS:
(FactSet)
The first screen includes only “buy” percentages or equivalent valuations, as none of the analysts have “sales” or equivalent valuations on any of the listed MSOs. You can see that the feeling is strong for American producers.
The summary of the assessments is very different for the five major Canadian producers:
(FactSet)
Forward price-to-sales ratios are displayed, rather than the price to earnings, because companies at such an early stage of growth do not focus on reserving profits. For comparison, the forward price-to-sales ratio for Nasdaq Composite Index COMP,
is 4.2.
Click here for an update on the merger proposed by Aphria Inc. and Tilray Inc.
Read: Why this cannabis giant is betting on Europe to build a war chest before the bonanza of US legalization