Some cannabis stocks are popping. Here’s why.

Equities
Investments

A number of cannabis equities are showing strong movement today as a cohort of pro-marijuana congressmen has taken the chance to potentially push some legalisation legislation through.

Cannabis stocks to watch

Major growers and distributors of cannabis, both medical and recreational, are starting to pop in trading.

Tilray is up 3.6% while Canopy Growth is showing similar numbers at 3.7%. Sundial Growers and Curaleaf had gained 1% and 3.7% respectively yesterday too. Aurora Cannabis joins its coteries in showing growth, clocking in at 3.7%.

Our Cannabis Blend, which groups together five leading growers, is also showing a 3% daily bump.

It’s clear that marijuana stocks are doing well today. The question is why?

Pro-cannabis bill tacking onto Pentagon budget resolution sends stocks upwards

The US military and the worldwide cannabis industry don’t seem like the ideal bedfellows. However, some congressmen have spotted an opportunity to tie the two together – or at least piggyback off the back of Pentagon budget bills.

On Tuesday, the House of Representatives’ version of the SAFE Banking Act was tacked onto the 2022 National Defence Authorisation Act (NDAA). The NDAA basically approves the Pentagon’s budget for the coming year.

For context, the SAFE Banking Act makes it legal for companies to make profit off the sales and marketing of recreational marijuana products. There are billions of dollars at play here, so if it passes into law, the stocks mentioned above could gain massive traction.

Quite cleverly, Rep. Ed Perlmutter of Colorado, one of the SAFE Act’s key exponents, rationalised the bill’s importance on a national security level. It’s an impressive piece of theatre to equate legalised cannabis with a safer, securer United States, but in a military-focussed nation like that, it’s an important piece of rhetoric.

Perlmutter said: “This bill will ill strengthen the security of our financial system in our country by keeping bad actors like foreign cartels out of the cannabis industry. This is a public safety and a national security matter — very germane to the issues at hand, dealing with foreign cartels.”

As the representative for Colorado, Perlmutter will have had first-hand experience with legalised cannabis. As of 2021, over $10bn worth of marijuana products have been legally sold in Colorado – the first state to fully legalise recreational use. Of that, the state government has taken a $1.6bn slice.

But what about crime? Perlmutter’s words are based on public safety. According to a report by the Colorado Department of Justice, between 2012 and 2019, the state reported a 68% drop in cannabis-related arrests. This stands to reason. Makes something legal that was once illegal then the arrest rate will drop.

However, the number of DUI arrests went up by 120% across the same period. Not a great look when making a public health argument.

The SAFE Act’s overall passage will presage a wider debate on whether to just federally legalise marijuana anyway, rather than legislate it piece by piece. It would perhaps be an easier option than a lengthy legal process.

It’s thought that, sooner or later, cannabis will become fully legalised for recreational use in the United States. If that happens, it may be a bellwether for other countries and usher in legalisation on a global scale.

But let’s not get ahead of ourselves. Movement is being made, which is good for cannabis stocks like those mentioned above, but there is still some way to go yet.

The likes of Tilray and Canopy Growth have posted strong growth numbers this year. Canopy’s Q1 revenues 2022, for example, were up 23% year-on-year in August.

Reports show Tilray’s revenue grew by 27% to stand at $513 million. The company also reported an adjusted EBITDA of $40.8 million, representing a massive 598% year-over-year increase.

There are big, big sums coming out of these companies – but everything now hinges on how the US proceeds regarding further Cannabis industry growth prospects and share price performance.

European stocks soft into the weekend, pot stocks’ comedown

Morning Note

European stock markets got off to a soft start on Friday as investors sounded a cautious note to end a week marked by a general lack of direction. The S&P 500 rose slightly on Thursday to eke out a fresh record high with the Nasdaq up 0.38%. Stock markets across Asia are closed for the lunar new year celebrations. The NYSE will be closed on Monday for the Presidents’ Day holiday.  

 

Britain’s economy held up better than expected in the final quarter of 2020, but the outlook for the start of 2021 is a little bleak. Gross domestic product (GDP) grew by 1% after Q3 growth was revised to +16.1%. Despite this, the economy is still 6.6% smaller than it was before the pandemic and restrictions that remain in place are crippling. Vaccines might get the economy roaring again, but only if the government has the bottle to end restrictions as quickly as possible. 

 

Cue Jet2, which has raised £422m in a placing because of uncertainty over travel and the summer season. Executive chairman Philip Meeson said the funding will “will provide sufficient liquidity on an extended and likely unpredictable shutdown basis to deal with this continually challenging trading environment”. The government has been striking a very downbeat note on booking summer holidays despite a startling fall in cases and rapid vaccinations, which has many worrying that restrictions won’t be dispensed with as quickly as they should. Shares fell 6%.  

 

Instant comedown: pot stocks reversed gains as a Reddit-fuelled rally unwound in spectacular fashion. Tilray declined 50% – its worst day on record – having jumped 50% the previous day. Canopy Growth, the largest stock, fell 22%. It’s schizophrenic market we trade in these days. Meanwhile, US regulators are probing whether market manipulation or other forms of misconduct was behind the rally in GameStop last month.

Cannabis stocks have opened lower.

Disney shares moved higher after another blockbuster quarter for its streaming service offset losses at its parks. Revenues from parks fell 53% due to pandemic closures, but subscribers to its Disney+ streaming platform reached almost 95m. Including Hulu and ESPN+, Disney’s paid streaming membership now exceeds 146 million. It is catching up with Netflix quickly as it throws some serious effort into new content and has the advantage of established brands and intellectual property like Star Wars. Average monthly revenues from Disney+ subscribers fell to $4.03 from $5.56 however, after the launch of its Disney+ Hotstar service in India and Indonesia last year. Whilst the outlook for its streaming service is positive, for parks it will be determined by the rate of vaccination and opening up international travel. 

 

Elsewhere, the dollar found some bid in early trade on Friday as bulls seek again to reverse the downtrend. GBPUSD retreated to test trend support under 1.3780, whilst EURUSD tests 1.210. Oil is a touch weaker after a downbeat report from the IEA, which said oil demand is expected to fall by 1 mb/d in the first quarter from already low Q4 2020 levels. 

 

Bitcoin hit a fresh all-time high a little short of $49k after BNY Mellon and Mastercard delivered more of the corporate support + mainstreaming that has been building in recent months. BNY will become the first big national custodial bank to offer custody services for crypto assets. Cryptocurrencies are becoming part of the mainstream, the bank says. Mastercard will start supporting some cryptocurrencies later this year, which of course follows PayPal’s big announcement last year that stoked the bull market in the fourth quarter. Hot off the heels of Tesla’s $1.5bn investment in Bitcoin these developments, these developments are giving more juice for the rally.  

 

Chart: The FTSE 100 has traded in a tight 100-point range in February

How to trade & invest in cannabis stocks

The cannabis industry is fertile ground for investors, being relatively new. Legal medical and recreational consumption is gaining support globally. As such, cannabis stocks can create exciting opportunities for adventurous investors. Here’s how. 

Investing in cannabis stocks 

The industry and products 

Cannabis is split mostly between recreational and medical marijuana. The industry itself is expanding quickly. Reports and research from the likes of Grand View Research suggest the worldwide cannabis industry will be worth US$73.6bn by 2027, growing at a CAGR of 18.1%. 

At present, the focus is more on medical cannabis stocks, although legal personal use could gain more traction as the decade progresses. Medicinal marijuana has been legalised in many nations, including the UK, Canada, Germany and Australia and in 30 US states (despite being illegal on a federal level). 

What cannabis stocks can I invest in? 

Cannabis stocks are split into three main categories: 

  • Growers – As the name suggests, these are the companies that grow, harvest and wholesale distribute the plant. Legal constraints mean there are fewer companies operating in this area than others, however, Canadian companies are starting to emerge as market-leading growers as cannabis was fully legalised for recreational use there in 2018. 
  • Biotechs – Biotech companies concentrate more on medical marijuana development. Often, their products will be synthetic, rather than natural, but biotechs are still classed under cannabis stocks. 
  • Supply providers – These types of companies are concerned with tools and materials needed to grow the plant itself. Think products like light systems, hydroponic equipment, and soils and fertilisers.  

Investing in cannabis: risk vs reward 

If you are thinking about taking the plunge into the world of cannabis trading, then you will need to consider its potential risks. 

Firstly, despite the UN removing cannabis from its schedule of narcotics, the drug is still illegal for both medical and personal use in many countries around the world. Only Canada and Uruguay have fully legalised it.  

That means, when choosing , you might want to consider UK cannabis stocks from medicinal companies, or Canadian growers, and so on, because they will not face the same legal hurdles as say US firms where it is still technically illegal on a federal level. 

Price volatility is another aspect to take into consideration. Because of the industry’s growth potential, marijuana shares may not reflect the company’s actual profitability and individual growth. Much of the talk around cannabis is based on optimism, rather than current fundamentals. 

Which asset do you want to trade? 

Marijuana stocks are shares in publicly traded cannabis firms. In the past, such companies may have struggled to be listed on stock exchanges. But things have changed with the softening of attitudes towards the drug. You will now find cannabis stocks on exchanges like the NYSE, NASDAQ and Toronto Stock Exchange (TSX). 

Companies identified as ones to watch in the world of cannabis include: 

  • Canopy Growth – An R&D focussed firm 
  • Tilray Corp – Tilray has just signed a merger with fellow Canadian grower Aphria to form the world’s largest cannabis company worth US$2.8bn. 
  • Aurora Cannabis – A producer first listed on the TSX and subsequently has been on the NYSE since October 2018. 

Markets.com also has its own cannabis blend, gathering a number of stocks together in one place similar to an ETF. This may be an option for you.  

Trading vs investing in marijuana 

It’s important to learn the difference between investing and share trading. The key differences are: 

  • The timeframe positions are held for
  • How profit is made 

Investing 

Investors buy shares outright. They hope that they will increase in price so they can be sold for a profit at a later date. That means they tend to hold onto shares for a long period of time, so they can attempt to profit from any changes in share price and through any dividend payments they may be accorded as share owners. 

Our Share Dealing and Investment Strategy Builder platforms have been developed with investors in mind. There are plenty of cannabis shares available to choose from here, including the big-name growers mentioned above. 

Trading 

Trading stocks uses derivative products like stock contracts for difference (CFDs) or spread bets. This means they take their value from the underlying market the asset is drawn from. Traders in this case do not own the shares. However, they can make a profit on the share price movement from rising or falling shares. As such, these trades take short to medium-term positions, instead of long ones. 

Marketsx is our dedicated trading platform where you will find our available marijuana CFDs and blend. 

Are cannabis stocks poised for a second wave?

Equities

Fresh US legislation and a major merger between two Canadian pioneers suggests a second wave of investor interest might be coming for cannabis stocks. 

US legislation could signal cannabis stock rally 

The US House of Representatives has passed some of the most pro-liberalisation cannabis law reforms the country has witnessed: the MORE Act. 

The Marijuana Opportunity, Reinvestment and Expungement Act calls for removal of cannabis from the list of federally controlled substances, as well as doing away with certain cannabis-related convictions. 

This suggests good things are coming to the marijuana sector in the US. Several states have already made either medical or personal consumption legal, but it is still illegal on a federal level. However, the terms of the new bill will insulate individual states from federal oversight, meaning they essentially can set their own laws and let cannabis-related businesses operate without fear of prosecution. 

As it stands, only six states remain where consumption of cannabis is still fully illegal. Across the remaining states, medical and personal use is either legal or decriminalised.  

Joe Biden’s upcoming administration has also inspired optimism in marijuana enthusiasts and cannabis businesses. His White House could potentially be more pragmatic and friendly towards cannabis use. Even so, the MORE Act was tabled before the US election, so the move towards full, federal legalisation could happen sooner rather than later. 

MORE means cannabis companies should be able to compete on a more even footing with regards to tax, provide them with better access to capital, and possibly stimulate further institutional investment. It could also ease along the passage of the Safe and Fair Enforcement (SAFE) Banking Act. SAFE relates to the disposition of funds generated from the cannabis industry. Essentially, it will let banks accept and process money from cannabis businesses as the money would be legitimate. 

Canadian cannabis firms merge 

North of the border, two of Canada’s largest cannabis growers have announced merger plans that will turn the joint venture into the world’s largest cannabis company. 

Tilray and Aphria will merge an all-share deal which will give the new entity a valuation of CAD$4.8bn ($2.8bn). The two companies’ combined revenues across the past 12 months has totalled in excess of CAD$875.5m ($689.7m). 

Canadian firms are looking southward and seeing a potentially massively lucrative market in the US. But, as it remains illegal under US federal law, cross-border movements is still off limits. 

The merger, according to Tilray, will generate up to CAD$98.4m ($77.4) in cost savings annually. Tilray, for instance, won’t have to buy wholesale cannabis from other suppliers. Instead, the new entity can concentrate on increasing the output of branded edible cannabis products – products in high demand during lockdown. 

Canada is one of world’s legal cannabis leaders. Full recreational legalisation was ratified there in 2018. Many of its companies, like Canopy for instance, already have tie in deals with American celebs like Snoop Dogg and Martha Stewart. It’s hoped, with the MORE Act, that full legalisation will be coming soon to the US, and Canadian cannabis capital can start pouring in. 

International cannabis stocks offering solid returns 

A number of international cannabis-related firms are beginning to show why faith in a second investor wave is strengthening. GrowGeneration Corp, which sits in the Rize ETF tracker, contributed 60% of the returns to the Foxberry Index in November 2020.  

Other similar companies performing well include the UK’s GW Pharmaceuticals and US-based NewAge Inc. All of the firms mentioned here are at the forefront of rapid market development. 

A bright outlook for cannabis shares? 

All of the above are creating an ideal blend of market conditions that has investors jonesing for their cannabis investment fix. Will be the hit they’re looking for? It’s possible, but a lot does hinge on how the Biden administration approaches the cannabis question.

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