What do you think of cannabis stocks

Cannabis Stocks: Up to 80 Percent Loss - Now What?

On November 2, 2010, Proposition 19 was put to the vote in California. All citizens of the West Coast state entitled to vote had to decide in a referendum whether the cultivation and sale of bogus hemp for consumption should be legalized.

Ultimately, however, 54 percent of the citizens voted against it, which is why California's then Governor Arnold Schwarzenegger did not have to deal with the issue any further.

A few years later, the time had come: in 2016, another referendum, Proposition 64, led to success. Marijuana use has been officially legalized in California since January 2018. Above all, many start-ups, which are also found very often outside of Silicon Valley, quickly identified a niche in the market and specialized in the cultivation and sale of bogus hemp.

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Cannabis thrives on the stock market

However, as in all potential new growth industries, companies initially need venture capital. If this step has been successful and the companies have successfully positioned themselves on the market, further growth is the key. The companies then traditionally get the capital they need from the stock exchange.

And especially here there has been a real gold rush mood in recent years since cannabis legalization in California. Quite a few analysts even see the potential for new gold in hemp. In an interview with biallo.de in 2018, Professor Michael A. Popp, CEO of Bionorica SE, warned that the market would be too euphoric - in our opinion, this should not have changed much to this day if you look closely at the reporting in the business media.

Cannabis titles are still a much more prominent topic than traditional industry titles, especially in the USA. Despite all the enthusiasm, investors should not act rashly and take a close look at the various investment options, because, as always, the devil is in the details.

In addition, many marijuana stocks have let off steam after their high altitude frenzy: At the top, the losses last year amount to up to 80 percent. New commitments only emerge when the downward trend that has been going on since March is permanently broken upwards.

The big producers

It is noteworthy that the cannabis companies with the highest market capitalization are not based in the United States, but in the far north of Canada. Even many experienced stockbrokers, who are more concerned with classic industrial giants such as Unilever, Siemens or BASF, say little about the melodious names of the marijuana economy.

Therefore, here is a brief overview of the most interesting cannabis companies and their business models:

Canopy Growth

Founded in 2014 and based in Ontario, Canopy Growth is the largest producer of medical cannabis and by far the number one in the industry with a market capitalization of the equivalent of 6.4 billion euros. The company is growing both organically and through acquisitions and now operates numerous subsidiaries.

The Group's products are cannabis in dried form, as capsules or cannabis oil. Since its inception, Canopy has made several large acquisitions in the hundreds of millions, making it one of the impressive growth companies in this new industry. A major shareholder is the US beverage group Constellation Brands, which, among other things, sells the Corona beer brand.

The Canopy share did well better than the industry average in 2019 with a loss of "only" 27 percent. In December, the paper even broke its several month downtrend upwards. However, it has yet to be proven whether the trend break was sustainable.

Tilray

With a current market capitalization of 1.2 billion euros, Tilray is significantly smaller, but it should also have remarkable growth prospects ahead of it. The Canadian group specializes in medical cannabis, but also in marijuana research.

At the beginning of 2019, the former German Foreign Minister Joschka Fischer became a founding member of Tilray's international advisory board for the implementation of an aggressive, global growth strategy. There are also sales partnerships with the European pharmaceutical company Novartis.

Despite the good outlook, Tilray stock was badly shaken last year, posting a loss of 77 percent for the full year of 2019. The paper is still caught in the downtrend. Investors should therefore wait until the share breaks the upper line of the trend channel sustainably before entering the market.

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Aurora cannabis

Aurora Cannabis is now the largest hemp grower worldwide in terms of annual production and also falls into the growth stock category. The Edmonton-based company operates in 24 countries on five continents and is also very active in Germany. A production facility is being built at Leuna in Saxony-Anhalt, which will produce a ton of cannabis annually for the German market from October 2020.

The group is currently valued at the equivalent of 1.8 billion euros on the stock exchange and lost 65 percent last year. The downtrend is still intact. Recently, GLJ Research analyst Gordon Johnson caused a sensation by setting a price target of zero euros for Aurora shares.

Main reason for the devastating verdict: Aurora's high debt. In addition, the group has more than quintupled the number of shares issued to a good billion over the past three years. "The company plans to continue this dilution by gradually issuing shares," said Gordon. The analyst believes Aurora will run out of money by the summer.

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Cannabis ETFs on the rise

Fund providers are specializing more and more when it comes to ETFs in order to stand out from the competition and at the same time to open up new growth potential for investors. Nonetheless, cannabis ETFs are still a comparatively exotic investment. Only a few providers serve this segment and the focus is - as expected - on the US market.

Purpose Investments and HANetf have recently launched the first cannabis ETF in Europe. This can be traded with most brokers from January 13th. However, potential investors should be aware that the Medical Cannabis and Wellness UCITS ETF (NASDAQOTH: Medical Cannabis and Wellness UCITS ETF) focuses on companies that primarily produce cannabis for medical or therapeutic purposes. In addition, the index is made up of only 15 values, which is comparatively little for a broadly diversified ETF - especially since important industry figures mentioned here are not included at all.

We would therefore view an investment in this product rather critically. If the addition of individual values ​​for the depot is not an option, cannabis indices that are currently more established on the market are more suitable. But here, too, the following applies: You shouldn't underestimate the volatility of the industry. The market undoubtedly has further growth potential, but investors not only need staying power, they also need an appropriate willingness to take risks.

In our opinion, the following ETFs are currently worth a look in terms of fund volume and yield development. It is possible that other fund companies such as iShares or Xtrackers will also launch other corresponding ETFs in the future.

The largest U.S. cannabis ETFs

ETF

Fund volume

Performance 2020

Performance 1 yearPerformance 3 years

ISIN

ETFMG Alternative Harvest

$ 702 million

-4,3 %


-38,6 %

-10,2 %

US26924G5080

Horizons Marijuana Life Sciences

$ 732 million

-7,2 %


-45,1 %

n / A.

CA44054J1012

Sources: Bloomberg; own research.

In July 2019, Innovation Shares issued a new cannabis ETF under the ticker "THCX" on the New York Stock Exchange (NYSE). What is special about this product is that no tobacco or alcohol titles are added and the portfolio is not realigned quarterly, but monthly.

That sounds interesting, but investors should be careful with an entry, especially since the share has more than halved since the issue. Whether the ETF will establish itself in the long term depends largely on the fund volume. The benchmark here should be that this is around 500 million euros, then a discontinuation of the ETF is relatively unlikely. The volume of the new cannabis ETF is currently a good 15 million US dollars, the equivalent of just under 14 million euros.

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Conclusion

When it comes to securities, the first question that always arises is the aim with which you invest and what risk you want to take for it. In our opinion, cannabis companies can be an attractive growth investment, but there are also risks that should not be underestimated.

The further development in the USA depends on a liberal drug policy and of course that is by no means guaranteed. For example, if there is a change of government to the conservative Republicans in states ruled by governors of the more liberal Democratic Party, the cannabis boom there could quickly come to an end.

In addition, as a long-term investor, one should not be blinded by current "hype", because it is also not certain whether marijuana will turn into valuable products for the pharmaceutical industry in the long term (which can also be sold at high prices on the market in the long term).

Nevertheless, experts currently see great growth potential for the industry. Morningstar analysts, for example, assume that the market will grow almost tenfold by 2030.

If you want to get in, you should use cannabis stocks or ETFs as an addition to a broad investment mix. Investing exclusively in a marijuana company or a corresponding index fund is not recommended due to the risk and uncertain future developments - especially not if the investment is used for retirement provision.

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Biallo tip

Participating in the cannabis boom is also possible without a direct investment in the producers. It is not uncommon for large, well-known corporations such as Altria or Constellation Brands to hold shares in cannabis companies. In many cases, these corporations' stocks are already part of large global index funds. For example, anyone who has an MSCI World ETF in their custody also invests indirectly in the cannabis industry.



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