The AdvisorShares Pure Cannabis ETF [YOLO] has continued to trend downwards since hitting a 52-week high of $31.87 during intraday trading on 10 February. Uncertainty over US cannabis legislation has produced volatility in the fund’s price performance, but can positive earnings help it generate new highs?
The AdvisorShares Pure Cannabis ETF had climbed 47.2% in 2020, helped by growing demand for cannabis as people relaxed at home during the coronavirus pandemic.
The fund continued to light up at the start of the year when it soared 180.6% over the past 12-month period to close at $30.56 on 10 February 2021. The main driver was the election of president Joe Biden, which raised hopes of a swift end to US federal cannabis prohibition.
Returns rise of the AdvisorShares Pure Cannabis ETF in 2020
However, the AdvisorShares Pure Cannabis ETF’s price has flagged since ending the first half of the year up 24% at $21.09 on 30 June. The fund has fallen 13.8% since then to close at $18.17 on 13 August.
The decline came after the US cannabis industry gave a disappointing response to Senate majority leader Chuck Schumer’s draft bill – the Cannabis Administration and Opportunity Act – that would federally legalise cannabis in the US on 16 July. Schumer needs 60 votes to win, however, he has already admitted that he doesn’t have those votes at present.
As of 13 August, the AdvisorShares Pure Cannabis ETF had net assets of $294.1m, down from $408.9m in early April.
Earnings revitalise cannabis stocks
The AdvisorShares Pure Cannabis ETF became the first actively managed fund with dedicated cannabis exposure available in the US when it launched on 17 April 2019.
As of 13 August, the fund has around 38 holdings, with Canadian cannabis grower Village Farms International [VFF.TO] having the biggest weighting at 14.5%, medical cannabis-focused real estate investment trust Innovative Industrial Properties [IIPR] coming next with 13.91%, Green Thumb Industries [GTBIF] with 7.77%. Other holdings include GrowGeneration Corporation [GRWG] with 5.3%.
Shares in Village Farms have dropped 41.2% in the past 12-months to 13 August. That’s despite posting recent second-quarter earnings showing a 264% hike in adjusted EBITDA to CA$9.1m.
The company is anticipating further sales growth and upped its growing capacity by 50%. In the earnings report, it also hailed Schumer’s bill, which could allow it to “participate in the high-THC cannabis market in the US”. It sees “at least” a $1bn sales opportunity.
“We anticipate real estate lending will increase over the intermediate-term as operators look to optimize balance sheets and expand operations” - JMP Securities analysts
Meanwhile, shares in Innovative Industrial Properties have soared in the past year, gaining 102.4% (through 13 August). The group buys up facilities producing cannabis and then leases them back out. It’s proving to be a popular model for growers anxious for funding, with second-quarter revenues rising 101% to $48.9m.
“We anticipate real estate lending will increase over the intermediate-term as operators look to optimize balance sheets and expand operations,” JMP Securities analysts recently stated in Investor’s Business Daily.
GrowGeneration’s shares have also risen 151.9% in the past year (through 13 August), fuelled by strong demand for the specialty hydroponic and organic garden centres owner. Its second-quarter revenues hit a record $125.9m, up 190% year-on-year, driven by new acquisitions and its e-commerce platform.
A growing addressable market
The cannabis market shows no sign of slowing. Legal cannabis sales reached $17.5bn in the US last year, up 46% from $12.1bn in 2019, according to research firm BDSA.
According to Grand View Research, the global legal cannabis market is expected to reach $70.6bn by 2028 at a CAGR of 26.7%, driven by increased legalisation of cannabis to treat chronic diseases and for adult-use.
Valuation of US legal cannabis sales in 2020
Legalisation is not just a growing topic in the US. Mexico legalised cannabis earlier this year with Poland, Ukraine, and potentially Germany, also inching closer.
There are concerns over the failure of many cannabis companies to turn a profit over the last 12 months, continuing health concerns and of course the fate of the US federal legislation.
But the long-term vibes for the AdvisorShares Pure Cannabis ETF look strong. As of 16 August, 18 US states have legalised recreational cannabis and 37 legalised medical use with more likely to follow as they look for tax revenues post-pandemic, according to The Globe and Mail. The Federal ban may not end this year, but it is now firmly on the agenda and US and Canadian cannabis firms are poised to invest.
“Not all cannabis companies are created equal, and we would urge investors to look at the US market” - Charles Taerk
As reported by the publication, Morningstar equity strategist Kristoffer Inton believes investors should be looking at ETFs such as Yolo holding US multi-state cannabis operators. “Some [ETFs] limit themselves only to the Canadian companies,” he said. “That doesn’t give you as good an exposure to the US market.”
The “US is best” said Faircourt Asset Management president and chief executive Charles Taerk in the same article. “Not all cannabis companies are created equal, and we would urge investors to look at the US market,” he said.