Cannabis inflows and the potential for outperformance

Extremely low valuation may be an entry point

While we have seen a broad-based market sell-off, those companies deemed ‘higher risk’ have been hit much harder. Cannabis stocks are a prime example, with their stocks down massively over the past year or so. Cannabis companies have struggled for several reasons since the early honeymoon days of speculation. As the industry matures, the companies have suffered from:

1. Inventory write-downs
2. Pricing pressure
3. Unclear path to profitability

It makes sense that investors do not want to be investing in companies that cannot generate a profit while heading into a recession. However, it is important to realize that these companies are generally well-capitalized to weather economic downturns, having been able to raise a lot of money when their valuations were much higher. 

These companies are not high-quality companies by any means, however there are multiple catalysts that can drive these stocks higher, with the largest being U.S. federal legalization. The second largest would be the companies actually becoming profitable and potentially being able to attract more investors from different cohorts.

ETFs to gain exposure to cannabis

There are a number of cannabis ETFs (with interesting tickers) that investors might want to consider should they wish to gain exposure to the sector. Some are more focused on the Canadian licensed producers (given that many U.S. companies are traded in OTC markets and are not publicly traded on official stock exchanges). Others are more focused on the entire supply chain and related industries within the cannabis sector, holding more of the OTC companies. Examples of cannabis ETFs include:

MSOS (AdvisorShares Pure US Cannabis ETF)

• AUM: $628M
• 1mo Flows: +0.24%
• 1mo Performance: -7.1%

YOLO (AdvisorShares Pure Cannabis ETF)

• AUM: $628M
• 1mo Flows: +0.24%
• 1mo Performance: -11.9%

POTX (Global X Cannabis ETF)

• AUM: $58M
• 1mo Flows: +0.10%
• 1mo Performance: -15.1%

It should be noted that these companies are still very speculative and that the potential growth catalysts may have a low likelihood of occurring (or may not occur at all) over the next few years, so these investments should only be borne by those with high risk tolerance, and should be a small allocation of an overall portfolio.

Data for this article is as of September 13, 2022.

Disclaimer: This article is limited to the dissemination of general information pertaining to investment strategies and financial planning and does not constitute an offer to issue or sell, or a solicitation of an offer to subscribe, buy, or acquire an interest in, any securities, financial instruments or other services, nor does it constitute a financial promotion, investment advice or an inducement or incitement to participate in any product, offering or investment.