Cannabis Stocks: Why Stocks Are Worth Keeping an Eye on

by Emmeran Eder, Euro on Sunday

Whey stoned cannabis stocks in North America have been behaving lately. Some stocks jumped 20 to 50 percent in a week – as if they were high. These included the industry giants Tilray, Aurora and Canopy Growth.

The reason for the enormous price increase was that a bill to legalize cannabis nationwide will soon be introduced into the House of Representatives. The draft is called the Marijuana Opportunity Reinvestment and Expungement Act, MORE Act for short. This provides for the legalization of hemp products, a federal tax on them and the rehabilitation of previously convicted criminals. The use, possession and sale of cannabis in the United States is prohibited by federal law. It cannot cross a state line – cannabis sold in a province must have been grown and processed there.

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However, 18 of the 50 American states as well as Washington, DC, have legalized cannabis as an intoxicant for people over the age of 21. Widespread market liberalization across the state could spark a nationwide cannabis fever in the US and provide strong sales increases for companies operating in this segment. That explains the leaps of joy in cannabis stocks.

The United States wouldn’t be the only country where cannabis would be legal. This has been the case for some time in Canada and Uruguay. This is being discussed in other countries – not least because of the aim of generating tax revenue and relieving the burden on the judiciary.

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Majority is for release

The new legislative initiative in the USA is no coincidence. According to a survey by the market research institute Gallup, two-thirds of Americans support the legalization of cannabis. The Democrats introducing the bill can thus point to the support of the majority of the population.

However, the chances that the proposed legislation will be implemented are slim. A similar bill won a majority in the House of Representatives in December 2020 but was rejected in the Senate. Wall Street analysts expect the scenario to repeat itself again this time. “We expect the MORE Act to pass the House again, but we see it primarily as a messaging bill as it has little chance of getting through the Senate,” said Isaac Boltansky, strategist at brokerage house BTIG. A messaging bill is a draft law that aims to enable candidates to score points in the election campaign with the initiative on a topic, but for which majorities are not necessarily calculated. At the time of going to press, it was not yet known how the vote in the House of Representatives would turn out.

In addition to the legislative initiative, several large takeovers within the sector have recently given the shares momentum: Cresco Labs will acquire Columbia Care for two billion US dollars, while Aurora announced that it will buy TerraFarma for around 30 million dollars. In addition, the covering of short sellers had contributed to the price jumps. Because cannabis stocks, like other risky segments, came under strong pressure last year. The titles of North American industry giants such as Tilray, Canopy Growth and Aurora have fallen by more than 50 percent in the last twelve months. Some industry observers therefore now see them at a cheap level again in terms of valuation.

Because the growth prospects are good. Market research firm BDS Analytics expects U.S. legal cannabis sales to surpass $30 billion in 2022, up from about $24 billion last year. By 2026 it could be $50 billion. In comparison, Europe is still in its infancy, but is showing high growth rates. In 2020, 230.7 million euros were turned over on the legal European cannabis market. According to forecasts by the data provider Statista, sales could increase more than tenfold to 3.1 billion euros by 2025.

Lots of older consumers

According to Statista, 256 million people use cannabis worldwide. Compared to 2010, this is a two-digit increase. This number is likely to increase further. Fewer and fewer young people see cannabis as a dangerous drug. While smoking cigarettes is out, marijuana is in. In addition, the substance is no longer only in demand by young people, but increasingly older people are resorting to it to escape everyday worries or to relieve pain.

Since smoking joints is still illegal in many countries, it has so far only sparked limited course fantasies. Investors are particularly interested in the sale of non-intoxicating cannabis products, as this is already permitted in many countries. Whether as a skin care product in the cosmetics sector or in medicine as a painkiller or sleeping pill – the popularity of the hemp plant is growing. At the same time, the food industry is experiencing a boom in demand for cannabis-containing products. Studies are currently underway to prove the positive effects of using medical cannabis on pets. Dogs and horses could also benefit from the new form of therapy – and animal owners around the world are considered to be particularly solvent and willing.

Only for risk-taking investors

The segment is therefore attractive for investors, also because in addition to the possible applications that are already permitted, the legalization option is also a fantasy. However, the industry is highly risky. Stocks are very volatile. Solid supply and demand structures have yet to develop. Corporate profit trends are difficult to predict. Most are still losing. The investment category is also fairly new. The market capitalization of the companies is usually low. Furthermore, it is not clear which companies will emerge victorious from the expected consolidation process.

Some Canadian companies, which are also heavily active in the USA, have so far emerged as larger players. These include Canopy Growth, Aurora, and Tilray. In the medical sector, Irish Jazz Pharmaceuticals is an industry giant. But even these titles move up and down violently.

Since the MORE Act is likely to fail in the Senate, a consolidation in the sector’s stocks is more likely in the short term. After that, however, an entry with a small portfolio share is worth considering for speculative investors. After all, the long-term prospects are positive: growth rates are high and more and more states are likely to legalize cannabis.

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