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Cannabis ETFs: Opportunities beyond the typical stocks

Cannabis ETFs have started February in a blaze. According to our Thematic ETF Screener, the cannabis investment theme is up 37.87% over the month, more than double second-place Robotics’ gains of 15.24%. Top ETFs included the Global X Cannabis ETF [POTX], up 39%, and the Amplify Seymour Cannabis ETF [CNBS], up 34%.

The cannabis investment theme is clearly attracting major attention this year. The promise of more states legalising the drug, along with the possibility of a Biden-led White House pushing for legislation at a national level, could push pot stocks — and the ETFs that track them — higher in 2021.

This opportunity isn’t just consigned to North America. One of the big movers has been Tilray's [TLRY] share price, up over 47% last week after announcing authorisation to offer medical cannabis products in Portugal and France.

39%

Growth of the Global X Cannabis ETF in February

  

What are the investment options besides marijuana producers like Tilray, Canopy Growth [WEED.TO] and Aurora [ACB.TO]?

 

Opportunity outside pot stocks

Akerna [KERN], which makes tracking software for cannabis growers in the US and Canada, is an example of a company riding high along with the companies it supplies.

Akerna’s share price is up 39.3% over the past 5 days, and 96.3% in three months (as of 8 February’s close). The stock is also comparatively cheap, trading at $8.50 as of 8 February close. Tilray, by comparison, ended last week at $25.71.

Alan Sumler, who writes a monthly cannabis report on Seeking Alpha, believes Akerna could climb higher, benefiting from national cannabis legalisation in the US.

Sumler notes that revenues have been growing steadily, but Akerna is not yet in the “profit zone”. As it is a small-cap stock, the analyst recommends a cautious approach, although he sees the potential for Akerna’s share price to hit $11.60 if the upward trend continues.

"I rate Akerna as a value and growth stock because of their positioning in the cannabis industry. One can only image (I am sure their market analysis products can predict) that their subscription revenues will increase dramatically in the event of national legalization."

"I rate Akerna as a value and growth stock because of their positioning in the cannabis industry. One can only image (I am sure their market analysis products can predict) that their subscription revenues will increase dramatically in the event of national legalization” - Alan Sumler

 

Another company not directly producing cannabis itself, but still benefiting from favourable legislation, is Scotts Miracle-Gro Co [SMG], which is best known for its lawn and garden products. Robinhood notes that sales for Scotts’ hydroponics systems, which help grow speciality crops like cannabis indoors, were up 71% last year as more states legalised cannabis.

In the past 12 months, Scotts has secured 97.28% worth of gains, and has an average analyst price target of $269.50, according to Yahoo Finance — a 12.5% upside on Scotts’ share price at 8 February’s close.

 

Where next?

Akerna sits in the Amplify Seymour Cannabis ETF, which invests the majority of its assets in companies earning 50% of revenue or more from the cannabis and hemp ecosystem.

This ETF could provide investors with exposure to the support side of the industry. The two biggest market segments in the fund are cultivation and retail, and agricultural technology — both accounting for circa 27% of the fund.

For investors that want exposure to more typical pot stocks, the Global X Cannabis ETF could be worth considering. Top holdings include Tilray, Aphria [APHA] and Aurora — all of which have seen substantial gains since the start of the year. As of 8 February, the ETF was up 94.93% YTD.

$47billion

Estimated global cannabis sales by 2025

  

According to April 2020 research from Arcview Market Research and BDSA, a provider of cannabis-based research, global cannabis sales could hit $47bn by 2025, representing a compound annual growth rate (CAGR) of 21% from 2019.

"The cannabis industry may soon reach a watershed moment when U.S. states, faced with a looming global recession, consider cannabis legalization as a new and potentially lucrative source of tax revenues," said Roy Bingham, co-founder and CEO at BDSA.

That moment could be 2021.    

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