US President Joe Biden has recently announced a presidential pardon for individuals with federal cannabis possession charges. This, alongside other recent regulatory changes, conveys a change of perceptions towards the cannabis industry. Although many of the players are not yet profitable, a more favourable legal environment could prove to be a tailwind.
- US President Joe Biden just passed a bill to research cannabis for medical use
- The cannabis industry is growing at a 25.5% CAGR
- The Global X Cannabis ETF provides direct exposure to the cannabis industry
After years of debate, on December 2, US President Joe Biden officially signed the first standalone federal cannabis reform bill. The Medical Marijuana and Cannabidiol Research Expansion Act will provide federal support to cannabis research, and follows a pardon that the US President granted in October for all US citizens convicted of cannabis possession.
Many analysts in the cannabis industry see this as a huge step towards total legalisation, which provided a short-term boost for stocks in the space. On Thursday, October 6, following Biden’s announcement, the AdvisorShares Pure US Cannabis ETF [MSOS] rose 34%.
Growing like a weed
Companies like Curaleaf Holdings and Canopy Growth Corporation stand to benefit from the recent legislation. Both companies are involved in the production and distribution of cannabis for recreational use, with Canopy in both the US and Canada, and Curaleaf exclusively in the US, in states where cannabis is legalized.
A third stock in the space is that of Tilray’s, a cannabis pharmaceutical company. The company’s share price leapt 12% in early trading following news that Biden signed the cannabis bill. Although Tilray does distribute cannabis for recreational use, it has a large focus on the medicinal use case for it, which the legislation will benefit. Also, unlike the other two companies, Tilray has exposure to the European market. If favourable regulation changes continue in the US, it may not be long before the EU follows.
With research into the impacts of cannabis increasing, and political and social views towards it changing, it seems like only a matter of time before the plant is fully legal in the US. Once this happens, it’s likely that other countries such as the UK will follow suit. This provides a long-term runway for stocks in this industry to expand into new markets as the legalisation trend continues.
The global legal marijuana market had a value of $13.2bn in 2021 and is expected to grow at a compound annual growth rate (CAGR) of 25.5% per year until the end of the decade. This suggests a revenue forecast of $102bn in 2030, according to a report by Grand View Research. If legalisation picks up pace, the growth could come a lot sooner. The problem in the US today is that even though cannabis is legal at the state level, it’s not yet legal nation-wide. This makes transportation extremely difficult for companies distributing the drug, leading to increased costs for producers. Easements in regulation, as well as innovations in technology, will reduce costs for cannabis companies and should lead to profitability.
Funds in focus: Global X Cannabis ETF, Amplify Seymour Cannabis ETF
There are several ETFs that focus on cannabis stocks, one of which is Global X’s Cannabis ETF [POTX]. Tilray is the fund’s second-largest holding, at a weighting of 16.46% as of 9 December. Canopy Growth is number three at 14.91% of assets under management (AUM). Despite recent gains for the industry, however, the fund is down 60.3% year-to-date and 3.9% over the past month..
For exposure to Curaleaf, investors can look at the Amplify Seymour Cannabis ETF [CNBS], which has the company as its top holding at 10.36% as of 12 December. Tilray is the third-biggest holding at 8.30% of AUM. The fund is down 54.5% year-to-date and down 2.4% in the past month.
The ETFMG Alternative Harvest ETF [MJ] is the first ETF to focus on cannabis, and holds Tilray and Canopy Growth as its fourth and fifth top holdings, with respective weightings of 7.53% and 6.87% as of 10 December. The fund is down 52.5% year-to-date and flat over the past month.
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