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 industry can be for investors. Here’s a six-month chart showing the total returns for three actively managed exchange-traded funds in the space through April 19:
(FactSet)
Read: The cannabis banking bill has been approved by House
Those are dazzling numbers for any investment in a six-month period. But they also indicate wild volatility. All three hit their all-time intraday highs on Feb. 10. Since then, the Amplify Seymour Cannabis ETF has had CNBS,
is down 35%, while the AdvisorShares Pure Cannabis ETF YOLO,
is down 34% and the AdvisorShares Pure US Cannabis ETF MSOS,
29% gave up.
New bank account passes House
Supporting news came Monday night when the House passed a bill that would give cannabis companies access to the US banking system.
Before that, a lot of good news for the industry had been priced. For example, the real legalization of marijuana in New York State on March 30 – recreational use is now allowed and the legislation is not hiding behind lax “decriminalization” language – had not reversed the swooning of cannabis supplies.
A crucial distinction for investors to understand is that the five largest Canadian marijuana companies are publicly listed on US exchanges, but the US producers are only listed on Canadian exchanges. Shares of the US multi-state operators known as MSOs are available without a prescription or on Canadian exchanges because recreational marijuana is still illegal at the US federal level.
This means that several of the best-known marijuana companies – the Canadian one – cannot sell products in the US, while the MSOs only have free rein in the 16 states where recreational use is legal.
YOLO and MSOS have been able to get around that problem by using total return swaps for the MSOs. And on April 20 – yes, April 20, International Marijuana Smoking Day – Amplify ETFs announced that CNBS can now also buy MSO total return swaps.
The “big four” 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 view of Wall Street analysts is 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 US and Canadian marijuana producers.
The opinions of analysts
Despite being kept off the US stock exchanges, MSOs have received a lot of attention among analysts working for brokerage firms. To look beyond the four major MSOs, Dan Ahrens, the portfolio manager for YOLO and MSOS, has provided a list of six of “the current most important”.
One of these, TPCO Holding Corp. GRAMF,
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’s a summary of Wall Street analysts’ opinion for nine MSOS:
(FactSet)
The first screen only shows “buy” or equivalent ratings percentages, as none of the analysts has a “sell” or equivalent rating on any of the listed MSOs. You can see that the sentiment is strong for the US producers.
The summary of the ratings is very different for the five major Canadian producers:
(FactSet)
Forward price-to-sales ratios are shown instead of price-to-earnings ratios, because companies don’t focus on making a profit in such an early growth phase. For comparison, the forward price / sales 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 ahead of the US legalization bonanza