Wall Street High
The continuing volatile and prosperous potential of today’s cannabis stock market.
CANNABIS STOCKS ARE FAST BECOMING A FIXTURE IN investor portfolios, but is now the right time to get involved as so much uncertainty swirls? The past two years have been volatile for every market sector, thanks to COVID-19 above all else. The emerging pot market has admirably contended with the circumstances, federal legalization and other factors unique to this industry. Despite the substantial hurdles, cannabis is thriving. In 2021, global sales topped $37.4 billion, according to Prohibition Partners.
The growing sector’s strong performances netted savvy early investors worthwhile returns. However, some sources caution that the climate of today’s market may not allow for such returns and that those investing today should be prepared for the long haul if they want to see a profit.
Publicly traded cannabis brands are growing in presence on various global exchanges. For multiple reasons, cannabis companies often list on international stock markets, such as the Canadian Securities Exchange. Another popular choice is over the counter (OTC) trading, which uses a broker network rather than a traditional central exchange.
Leading causes for shying away from the US giants—New York Stock Exchange and NASDAQ—often include worries over American federal cannabis regulations and mandatory share minimum criteria that companies may struggle to meet at this time. However, plant-touching and ancillary brands have found some success in this country.
The array of listing options leaves brands and investors with various options. Going off market cap, Green Chip Stocks founder Jeff Siegel said investors have eight billion-dollar-plus companies to choose from as of January 2022: Curaleaf, Green Thumb Industries, Trulieve, Canopy Growth, Tilray, Cronos Group, Sundial and Aurora.
Siegel said investors might want to look beyond the market cap when considering stocks. Sources listed dozens of smaller cap options that may prove beneficial to an investor’s portfolio, with share prices often in single-digit sums.
Jumping into cannabis with singular stocks may not be ideal for those just learning about the market or those who don’t have the time to keep up with the constant fluctuations of the market. Javier Hasse, the managing director for Benzinga Cannabis and co-founder of Spanish language cannabis site El Planteo, discussed how exchange-traded funds (ETFs) could be a viable investment that requires less sweat equity. When?
“Investing in stocks is already hard on its own,” Hasse said. “Investing in a market that’s still nascent and as volatile as cannabis is particularly hard.”
Poseidon Asset Management co-founder and managing director Morgan Paxhia also touched on ETFs, noting their often-correlated activity, allowing investors to choose depending on their underlying investment strategies and other holdings. Some current industry-leading ETFs include AdvisorShares Pure US Cannabis ETF (MSOS), The Cannabis ETF (THCX), AdvisorShares Pure Cannabis ETF (YOLO) and Amplify Seymour Cannabis ETF (CNBS).
“We do believe over time that performance among the ETFs could meaningfully separate as we believe that the cannabis rising tide will lift seaworthy boats,” Paxhia said.
In late 2021, Poseidon launched their ETF with AdvisorShares under the name AdvisorShares Poseidon Dynamic Cannabis ETF.
Cannabis saw a boom in 2019 and 2020 as much of the US market remained open after receiving essential status, leading to continued sales success. The spike helped the industry recover from a bear market that had dampened previous high expectations and canceled many previously announced mergers and acquisitions.
Some entities didn’t perform well, especially those based in tourist locations, or medical ventures that saw intake numbers shrivel. That said, most US-based companies did perform admirably against the circumstances.
The pandemic and the market’s ongoing maturity left Hasse torn on market movements. “It’s still pretty early to tell how cannabis stocks as a group move in relation to markets,” he said, adding that he hasn’t seen direct correlations to economic cycles.
Others were more certain about market movements. Debra Borchardt, co-founder and executive editor of online cannabis stock publication, Green Market Report, noted that cannabis stocks typically “tend to trade as a group despite some companies performing better than others.”
Jacqueline Bennett, managing partner at Highlands Venture Partners, offered a similar take. “Maybe during earnings there’ll be some type of reaction that’s aligned with the performance of the underlying operation, but most of the time you’re seeing the entire index moving in the same direction,” she said. Bennett noted that the movement is indicative of economic and other macro conditions affecting the cannabis market.
The circumstances can make share price valuations frustrating for investors. “The company may be reporting record sales numbers, but then experience a sell-off as other poorly performing companies bring the group down,” Borchardt said. She added that “stock jocks,” or investors that trade for profit rather than underlying company ownership, can also harm stocks.
Like the pandemic, US regulations loom overhead, stunting the market’s true potential for growth and return on investment. Under Presidents Trump and Biden, reform made little progress, save for the advancement of the MORE and SAFE Banking Acts in Congress. While their progress is symbolic of reform’s rise, it won’t do anything to improve banking or investment opportunities at this time. Analysts don’t expect reform to occur under the current Congress or President Biden.
“Despite this being a somewhat bipartisan effort and having constituent approval, Congress just hasn’t been able to make headway and possibly won’t in the near future, as other more pressing issues have had priority,” Borchardt said.
She said the ongoing regulations hurt businesses and companies struggle to find eCommerce vendors and secure banking accounts. “Plus, if cannabis companies had access to the big banks, they could also have access to the major US stock exchanges,” he said.
The issues extend to trading as well. In November 2021, JPMorgan restricted brokerage clients from buying certain cannabis stocks, noting potential bank losses from private fund collapses. Despite ongoing industry restrictions and federal regulations, optimism remains high for the long-term.
“While it’s difficult to quantify the momentum—or lack thereof—with any particular piece of legislation, we fundamentally believe that cannabis legalization efforts, license issuance and consumption itself will continue to increase and support the industry overall as cannabis markets grow and scale,” said Arden Lee, CFO of WM Technology, the operator of Weedmaps, a cannabis stock trading on the NASDAQ as a non-plant touching venture.
All things considered; Bennett may have summed up the growth sector best when she said cannabis stocks are “anything but stable” at this time.
Investments are all about timing. Some early investors have already seen returns. Siegel took pride in his clients scoring big on early investments in Canopy Growth, Organigram and Aphria. However, he said those days are now gone and that investors may have to hang around to see positive results.
“If you got in at the top, you’ll be licking your wounds for a while,” he said, adding that safer players such as Curaleaf may produce some gains in 2022 for investors.
Paxhia believes the market is facing a difficult period where capital isn’t flowing in like it was just a few years ago. The setback is coupled with substantial valuation compression. Today, cannabis companies compete for investor attention against other intriguing sectors ranging from tech to crypto and meta. Still, he notes that market prospects look bright.
“Long term, we still see a lot of opportunity, but this is coming from a firm that has been investing in the space for more than eight years,” Paxhia said.
WM Technology’s Lee offered a similar opinion on the market’s future, noting that few if any “truly high-functioning cannabis markets” exist in the US. “For example, there are more licensed cannabis businesses in Oklahoma than in California, yet California has four times the population and has legal cannabis,” Lee said. He also sees a bright future down the line. “This opportunity will be unlocked with continued license issuance and new market openings—which are questions of when, not if.”
With the market struggling, now may be a smart time to get in. For now, “The prices have fallen so low, this might be a good time to invest,” Borchardt said. She also noted ETFs as a potential pick.
Even with one’s financial ducks in a row, the ever-evolving cannabis market can still trip up investors while it evolves and solidifies into the giant market we know is coming.
“Be mindful of how much capital you feel comfortable putting at risk here, as it is risky and volatile,” Paxhia said.
This story was originally published in the print edition of Cannabis Now.