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  • Industry Spotlight
  • cannabis

What’s driving the cannabis theme?

On 2 December 2020, the UN’s Commission on Narcotic Drugs (CND) voted in favour of recognising the medicinal and therapeutic qualities of cannabis. This decision — alongside the Georgia runoff elections, which gave the pro-legalisation US Democratic Party control of both houses — paved the way towards cannabis reform in the US and triggered an explosion of the global market.

As of 2019, North America accounted for 88.4% of the global legal cannabis market. However, it remains difficult for cannabis companies to open US bank accounts as the drug is federally criminalised, despite being legal for medicinal purposes in 36 states and recreational use in 15.

The SAFE Banking Act would permit banks to engage with cannabis businesses, which could turbo-charge the industry in the US and beyond, as non-US banks are often reluctant to displease their US counterparts by entering the cannabis industry.

88.4%

of the global legal cannabis market accounted for by North America

  

The MORE Act, sponsored by US vice-president Kamala Harris, passed the House of Representatives in December and could see cannabis removed from the Controlled Substances Act at a federal level altogether. Alexandra Chong, founder of cannabis wellness company Jacana, recently told The Telegraph that if the US legalises cannabis “then money will flow into this industry, globally, very quickly”.

Cannabis has been legal for medical use, with a prescription, in the UK since November 2018, but access is limited. However, CBD, also known as cannabidiol, is legal in both the UK and US. Demand for the marijuana-derived compound is booming in the UK, Europe’s largest CBD consumer market at over £400m, in the form of wellness-focused creams, oils, capsules, pills and sweets.

 

Funding growth

2020 saw an increase in sales for cannabis companies in the US, as well as a spike for cannabis stocks. The day after US president Joe Biden’s election victory saw cannabinoid companies take the top five spots on trading app Robinhood and, in November 2020, global inflows to cannabis ETFs jumped to $122m from a monthly average of $14m over the previous year.

Until the end of November 2020, cannabis ETFs had significantly underperformed the general market. However, all five ETFs tracked by Opto’s Thematic ETF Screener have seen gains of between 30.7% and 44.9% over the past month. In the same period, the S&P 500 has gained just 2%.

Highest-performing among these ETFs is the AdvisorShares Pure Cannabis ETF [YOLO], which focuses on US and Canadian cannabis equities. The fund holds an unusually high 22.8% cash and, besides this, counts agricultural greenhouse operator Village Farms International [VFF], cannabis industry holding company Curaleaf Holdings [CURLF] and retailer Green Thumb Industries [GTBIF] among its largest assets. YOLO has grown 74.13% over the past year as of 21 January’s close, during which time the S&P 500 has grown 16.00%.

74.13%

Growth of the AdvisorShares Pure Cannabis ETF over the past year

  

The Global X Cannabis ETF [POTX] saw the most growth over the week ending 15 January, at an impressive 27.9%. This fund invests in companies “across the cannabis industry” including those “involved in the legal production, growth and distribution of cannabis and industrial hemp” as well as financiers of related medical and therapeutic products.

London-based investment firm Chrystal Capital Partners launched its Verdite Capital Fund last year. This sought to raise an initial $100m to invest in what Kingsley Wilson, an investment partner at the firm, believes will become “a highly regulated industry”, making it Europe’s largest cannabis-focused investment fund. The fund plans to invest half its assets in North America and at least 35% in Europe.

 

Pot stocks

Canopy Growth Corporation [CGC] is the world’s largest cannabis company by sales. The firm holds large cash reserves but has haemorrhaged money since it received a significant investment from Constellation Brands [STZ] in 2018, owing to its aggressive acquisition strategy.

GW Pharmaceuticals [GWPH] — a UK-founded, US-listed company that focuses on developing medical marijuana treatments, looks set to reach profitability in 2021 following high sales of its epilepsy treatment Epidiolex. GW Pharmaceuticals’ share price has gained 17.9% in the last month.

Two of Canada’s biggest licensed producers, Aphria [APHA] and Tilray [TLRY], announced plans to merge in December. Aphria’s share price has risen 72.18% in the year to date (as of 21 January’s close) and Tilray’s an impressive 99.11%, as the merger looks set to “create the undisputed leader in Canadian adult-use weed sales”.

99.11%

Tilray's YTD share price rise

  

A greener future

There are a number of factors which could power cannabis stocks’ future growth.

Constant research is improving our knowledge of the drug’s medical potential, with possible treatments for ailments ranging from cancer and arthritis to mental health conditions such as anxiety and Alzheimer’s all rooted in the substance.

The change in US leadership, as well as the pressure to increase tax revenues and fill US state budget shortfalls following the coronavirus pandemic could accelerate legalisation in the US.

All of these factors combine to paint an encouraging picture for the market, predicted to be worth $147bn by 2027. US retail cannabis sales alone could reach $37bn by 2024.

$37billion

Predicted valuation of US retail cannabis sales by 2024

  

The AdvisorShares Pure Cannabis ETF is forecast to lose value over the coming year, but could gain circa 9% over the next five, according to Wallet Investor. A higher-growth option could be the Cannabis ETF [THCX], expected to gain 6.0% in the next year and 94.1% over the next five.

Among individual stocks, GW Pharmaceuticals is rated buy by all but two of the 17 analysts polled by CNN Money, with the remainder rating the stock a hold. If hit, a median 12-month price target of $181.50 from 16 analysts offering forecasts would represent growth of 31.12% from 21 January’s closing price. The high target of $270 would see an impressive 95% increase.

The outlook is less favourable for industry giant Canopy Growth Corp which, thanks to recent cash flow issues, has a hold consensus among 20 analysts. 15 rate it hold, four buy and one sell. The 12-month price forecasts, from 17 analysts, make grim reading: the highest target of £32.41 marks a 3.43% fall from its closing price on 21 January.

Trulieve [TCNNF] could be one to keep an eye on over the coming 12 months. The Florida-based company is rated a strong investment by Shak Arunachalam, writer for Seeking Alpha, thanks to investors underestimating Florida’s medical-use cannabis market growth, the company’s successful expansion into other states, a “best-in-class balance sheet” and undervaluation compared with its competitors. Six analysts polled by Tipranks gave the stock a strong buy consensus, with a high 12-month price target of $58.85, implying gains of 33.96% from 21 January’s close.

Disclaimer Past performance is not a reliable indicator of future results.

CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.

The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although we are not specifically prevented from dealing before providing this material, we do not seek to take advantage of the material prior to its dissemination.

CMC Markets does not endorse or offer opinion on the trading strategies used by the author. Their trading strategies do not guarantee any return and CMC Markets shall not be held responsible for any loss that you may incur, either directly or indirectly, arising from any investment based on any information contained herein.

*Tax treatment depends on individual circumstances and can change or may differ in a jurisdiction other than the UK.

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