Smoking pot shares, Royal Mail delivers

Morning Note

Pot-boiler: Cannabis stocks are flying with the Reddit and RobinHood crowd piling on to the sector. Shares of Tilray, Canopy Growth, Aurora Cannabis and Aphria all surged as they have become the latest focus for the /r/wallstreetbets gang that drove GameStop, AMC Entertainment and others in recent weeks. There are several fundamental factors in play, such as Tilray and Aphria’s merger, which has sent shares in these stocks up 670% and 280% YTD respectively. Tilray this week struck a deal with Grow Pharma to import and distribute its medical cannabis products in the UK. Canopy Growth reported better-than-expected results this week. 

 

Expected legalisation in the US is fuelling the speculation in these names, with Democrats planning to end prohibition at a Federal level, which would be a clear tailwind for the sector. Indeed, the rally in pot stocks really started back in November on Biden’s victory and accelerated after the Georgia run-off result. However, these stocks are running up way beyond what the current path to legalisation will mean with regards earnings. Whilst acknowledging certain positive fundamentals, the valuations are looking extremely stretched, albeit we are not anywhere near levels seen during the cannabis bubble of 2018. The rally looks predominantly driven by retail traders. 

 

Some of the names are heavily shorted – short interest on Tilray stands at 23%. It may not be a GME situation, but it helps ease the path higher. Investors are getting high on pot stocks, but just like GME the comedown may be harsh. It’s another example of the excess, the frothiness and speculation that is running through corners of the market right now. We perhaps should be a little concerned about a ‘locust effect’, with stocks and sectors being pumped and dumped at will before the crowd moves on their next target. 

 

Pot stocks posted strong gains yesterday

Cannabis stocks performing well.

Cannabis Blend – a basket of cannabis stocks has been performing well since November

A blend of Cannabis stocks.

This morning, stocks edged a little higher in Europe after a mixed day on Wall Street, with the S&P 500 down 0.03% and the Dow Jones +0.2% and notching a fresh record high. The WHO says the AstraZeneca vaccine works for all ages, whilst Germany has extended its national lockdown to March 7th. AstraZeneca also said it will focus on adapting its vaccine for new variants.

 

Royal Mail raised its profit guidance due to a surge in parcel deliveries, with volumes up 30% year on year. Management now see annual adjusted operating profit significantly above £500m. Shares rose another 5%  – the company for long in the doldrums finally seems to be getting its house in order and is now a structural winner both from the pandemic and from a decade-long shift towards online shopping. E-commerce is key, but delivering PPE, home testing kits and vaccination letters has also helped.

 

Fed chair Jay Powell reaffirmed the central bank’s commitment to keep stoking the fires. Whilst the headline unemployment rate has fallen to 6.3%, Powell said the real level of joblessness was closer to 10% and that the employment picture is “a long way” from where it needs to be. He also downplayed the risk of inflation, saying he doesn’t expect “a large nor sustained” increase in inflation right now. Any price rises from a “burst of spending” as the economy reopens would be short-lived, he argued. Data yesterday showed US inflation rose more slowly than expected – CPI at 1.4% vs 1.5% expected. The pandemic continues to tame inflationary pressures, but this can only last so long. We should note that 1.4% was the fastest clip in five months. 

 

Oil prices rallied to a fresh year-high after the EIA reported a larger-than-expected draw on crude inventories. Crude inventories fell by 6.6 million barrels last week amid signs of a pick-up in refining activity on higher fuel demand, whilst imports also declined.  Refinery utilization rose 0.7% to 83%, whilst demand refined product supplied rising to 20.2 million bpd, highlighting improved demand. March WTI rose to $58.90 but has eased back to $58.30 this morning. Meanwhile the International Energy Agency (IEA) said this morning that global oil inventories fell more quickly than expected in the final quarter of last year. Stocks declined by 2.24m b/d in Q4 2020 as efforts by OPEC and allies to reduce output worked to draw on stockpiles. Early data also points to continued drawdown at the start of the year.

 

In FX, the dollar clawed back some small gains with GBPUSD hitting a session low under 1.3830 but remains supported above 1.380, yesterday’s low, whilst resistance seen at yesterday’s high at 1.3866. EURUSD was steady at 1.2130 with the bulls still in control.

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. 

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