Despite the chaos this past week with the mob storming the Capitol, Georgia's voters delivered a Democrat majority to the Senate. This means that cannabis legislation that was repeatedly stalled by the Republican-held Senate can now advance. Even though Georgia had no legalization efforts on its ballot, the state has given the industry a big green light, meaning positive moves are expected out of cannabis stocks.
Charlie Bachtell, CEO and Co-founder of Cresco Labs (CRLBF) said, "This is another big win for cannabis-although legalization was not on the ballot in Georgia, with a Democratic majority in the Senate we're likely to see support for cannabis decriminalization which could have an immediate impact on expungement, lessoning the burden on the U.S. justice system, and the passage of meaningful banking legislation like the SAFE Act would allow cannabis businesses to operate with the same access to capital and financial services as everyone else, accelerating industry growth and creating hundreds of thousands of good paying jobs and tax revenue."
Derek Porter, Chief of Staff of cannabis consulting firm Gateway Proven Strategies said, "The election and any government chaos can always have silver linings. The first advantage we've seen thus far is the principal sponsor behind the MORE Act being Kamala Harris, who is now going to be our new Vice President. Thus, having more power behind the bill that has passed the House."
Focused on the U.S.
There are literally hundreds of cannabis stocks trading on the exchanges in the U.S. and Canada. However, there are big discrepancies between the solid companies and the ones barely hanging on. Investors may want to pursue ETF's to start as they begin investing in the industry, however the focus needs to be on U.S. companies. ETF's predominantly invested in Canada won't have the same return as the market is learning its limitations on growth. Here's a rundown of some of the cannabis ETF's on the market.
- AdvisorShares launched the AdvisorShares Pure US Cannabis ETF (MSOS) in September and became the first U.S.-listed active ETF to deliver exposure dedicated solely to American cannabis companies, including multi-state operators (MSOs). MSOs are U.S. companies directly involved in the legal production and distribution of cannabis in states where approved. The company said that MSOs will seek long-term capital appreciation by investing entirely in legal, domestic cannabis equity securities. MSOs' domestic equity strategy allows this active ETF to allocate its underlying portfolio among multi-state operator (MSO) companies as well as other U.S.-based cannabis-focused areas such a REITs, cannabidiol (CBD), pharmaceutical and hydroponics.
- Amplify Seymour Cannabis ETF (CNBS) has 80% of the portfolio companies with 50% or more of their revenue from the cannabis and hemp ecosystem. The ETF has six U.S. companies out of its top 10 holdings with the largest holding in U.S.-based GrowGeneration (GRWG) . CNBS is comprised of stocks with no derivative exposure. PORTFOLIO MANAGER - CNBS is an actively managed portfolio which allows the ETF to adjust its holdings on a daily basis. Tim Seymour is the portfolio manager of CNBS. Tim has over 20 years of general investment experience and has been an early-stage investor and recognized voice in the cannabis industry.
- AdvisorShares Pure Cannabis ETF (YOLO) is another ETF that has a large exposure to U.S. cannabis stocks including the top MSOs. The difference between MSOs and YOLO is that YOLO also holds Canadian LPs like Village Farms (VFF) , which is its largest holding at 9.3%, and Aphria (APHA) and Canopy (CGC) are each weighted at ~4%. This may not be the optimal choice.
- ETFMG Alternative Harvest ETF (MJ) is a U.S.-listed ETF that does not have exposure to U.S. cannabis companies and its top holdings are largely Canadian LPs such as Aphria, Canopy, and Tilray (TLRY) . The company said that the subject of legalization of cannabis in several states has led to increased investor demand evidenced by the increased daily trading volume. It is the largest cannabis ETF with over $1 billion in AUM.
- The Horizons Marijuana Life Sciences Index ETF (HMLSF) says it seeks to replicate the performance of the North American Marijuana Index. The Index is designed to provide exposure to the performance of a basket of North American publicly businesses in the marijuana industry. However, HMLSF will not invest in any issuers that are primarily focused on serving the medical or recreational marijuana market in the United States. HMLSF's investment strategy does allow it to invest in companies from certain U.S. states where it is legalized. For example, it's second largest holding is Innovative Industrial Properties (IIPR) .
- Horizons seems to address the U.S. issue with the US Marijuana Index ETF or HMUS, which follows the performance of the US Marijuana Companies Index. Horizons says the US Marijuana Companies Index is designed to provide exposure to the performance of a basket of North American publicly listed having significant business activities in the United States marijuana or hemp industries. The top holding is Columbia Care (CCHWF) .
- The Cannabis ETF which trades with the ticker (THCX) says it seeks to provide investment results that correspond generally to the total return performance of the Innovation Labs Cannabis Index. The Fund will invest at least 80% of its total assets in the component securities of the Index. The Index is a proprietary, rules-based index designed to track the performance of a portfolio of Cannabis Companies. These Cannabis Companies are primarily located in the United States and Canada. Its top holding is also GrowGeneration.
The Managers Speak
Tim Seymour said, "With the GA runoffs resulting in a Blue majority in the Senate, investors are assessing the pace of legislation that will ultimately lead to a further re-rating of cannabis assets. For many who have been investing in the sector for years the question has never been about if, but rather when cannabis would secure broader support within Congress to advance necessary initiatives. For other investors who have been watching from the sidelines, this week has been a call to action for exposure to the sector."
He added, "We would expect 2H '21 or '22 to bring this legislation. The industry doesn't need full federal legalization right now to advance asset prices. Clearly addressing complex social equity, criminal justice issues, as well as other elements of how federal regulators across FDA, DEA, DOJ, Fincen (to name a few) will work together is critical to the industry as well. The STATES ACT will be a bazooka for cannabis assets."
Matt Markiewicz, Managing Director at THCX said, "I expect increased investor interest in cannabis stocks to start the new year. However, I would not be surprised to see some of that enthusiasm wane as we head into late February especially if the incoming administration isn't explicit in their intentions around legalization or at the least decriminalization. As long as the space doesn't materially weaken in the first quarter, we may see increased capital markets activity which could bring a fresh batch of institutional investors into the mix. The tailwinds for the industry are there, new capital needs to come in to take it to the next level however."
Finally, while cannabis stocks had a great fourth quarter with valuations rising, the bear market of 2019 caused so much price destruction that there is still room for recovery. Granted that prior to the bear market valuations were a bit inflated, but with the new Democratic control over the Senate, valuations could return to those lofty levels on the back of new legalization efforts.
