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The case for cannabis: how to access an emerging investment opportunity
There are good reasons to be excited by the prospects for the global cannabis industry as more countries legalise recreational usage and a plethora of new medical applications are developed.
In addition, an increasing number of cannabis-based consumer products are slated to enter the market over the next few years which should help to bring cannabis into the mainstream.
According to consultancy Research and Markets the worldwide legal cannabis market was valued at $20.5 billion last year and is projected to reach $90.4 billion in 2026, representing a compound annual growth rate of 28%.
In this article we highlight a relatively low-cost way to get diversified exposure to the sector and discuss some of the key names in the UK and overseas.
LONG-TERM POTENTIAL EVEN BIGGER
The long-term potential for cannabis is potentially even bigger than has been forecast if you consider that the illicit market is, according to some reports, worth around 10 times the legal market.
Despite the changing regulatory landscape, the negative image associated with cannabis, also referred to as weed or marijuana, still lingers.
It’s still illegal to grow or distribute cannabis for recreational use in the UK and the authorities consider financing of such activities as the proceeds of crime. Medicinal cannabis was made legal in 2018.
What is medicinal cannabis?
People have known about cannabis for thousands of years and it is known to contain dozens of active substances that influence the brain and body.
The best known are Tetrahydrocannabinol or THC, Cannabidoil or CBD and Cannabinol. CBD is used for medical purposes and doesn’t contain the psychoactive ingredient present in THC.
The effectiveness of cannabis is due to the natural way it interacts with the human body’s own endocannabinoid system which influences metabolism, energy balance, pain, emotional memory and appetite.
Researchers are studying cannabis for treating Alzheimer’s disease, cancer, diseases of the immune system, epilepsy, glaucoma, multiple sclerosis, nausea
and Crohn’s which is a digestive disorder.
LIMITED OPPORTUNITIES TO INVEST
For UK investors looking to get in on the strong growth prospects the listed choices are relatively scarce, although that will no doubt change. We discuss the merits of the existing plays later in this article.
The countries which legalised cannabis first have the most developed cannabis industries. The largest and most advanced are Canada and the US, so that is where you can find the largest quoted companies.
It’s often useful to look at countries which have already legalised to get an idea of the potential growth after legalisation.
After Canada legalised recreational cannabis in October 2018 (medicinal cannabis was legalised in 2002) it racked up C$1.2 billion (£675 million) in sales, which more than doubled to C$2.6 billion (£1.5 billion) in 2020.
Canada has around 275 cannabis growing businesses and 85 cannabis manufacturing enterprises.
MUSHROOMING INVESTOR INTEREST
The cannabis sector got a shot in the arm after the Reddit and WallStreetBets crowd chased cannabis stocks and indices following the merger of Tilray and Aphria, two of the largest cannabis companies.
Also influencing the run-up in stocks was speculation US president Joe Biden will soon legalise cannabis at the Federal level which would allow cannabis to move across state lines. (15 states have legalised recreational use, whereas 36 have legalised medicinal use).
Canadian based Tilray which is listed on Nasdaq with a market capitalisation of $3.8 billion is merging with Canadian listed Aphria to create the largest cannabis operator with combined revenues of over $600 million.
Tilray jumped 50% on the day of the news to $66 before falling back by two-thirds at the most recent price. Other stocks which moved strongly include Canopy Growth, up 128% over the last 12 months and Aurora Cannabis, up more than 1,145% on the same time-frame.
Exchange traded funds have also been in demand with the Rize Medical Cannabis & Life Sciences ETF (FLWG) doubling over the last six months and the Medical Cannabis and Wellness ETF (CBDP) surging by 82%.
In October 2020 the UK securities watchdog, the financial conduct authority said it would allow medicinal cannabis companies to list on the stock exchange, paving the way for companies to come to the market.
STRING OF RECENT IPOS
In early February 2021 MGC Pharmaceuticals (MXC) became the first medicinal cannabis company to list on the London stock exchange, with the shares advancing rapidly on debut. The shares have since given up a good chunk of those gains.
MGC is a biopharmaceutical company which is developing cannabis-based epilepsy and dementia drugs. It also has a Covid-19 drug called CimetrA which has been approved to go into phase three trials to evaluate efficacy and safety.
Shortly thereafter Israel-based medicinal cannabis company Kanabo (KNB:AIM) joined the market via a reverse takeover and also saw big gains on its first day of dealings.
The group has developed the world’s only medicinal cannabis vaporiser, designed to provide specific doses of cannabis extract without additives.
The increasing number of private clinics can now prescribe products like Kanabo’s VapePod on an individual basis to alleviate chronic pain as well as neurological conditions.
David Beckham backed synthetic cannabidoil consumer products company Cellular Goods (CBX:AIM) became the latest cannabis company to list on the London stock exchange (26 February) valuing the company at £25 million.
Instead of cultivating cannabis sativa plants and extracting the oil as is done traditionally, Cellular has found a way to manufacture the cannabis in the laboratory.
This is a ‘green’ approach because it saves on water usage while also reducing cultivation from 200 days to seven. The company plans to use the money raised at floatation to develop a range of skin care and sports recovery products.
Jersey based cannabis company Northern Leaf is planning to float on the London stock exchange later this year. It will grow cannabis from a 75,000 square foot greenhouse facility and expects its first harvest in the third quarter.
UK-based GW Pharmaceuticals was the first company to get a medical license in the US to sell Epidiolox, used for treating rare forms of epilepsy.
The company also sells cannabis extract for treating multiple sclerosis which is licensed for sale across many countries outside the US.
On 3 February GW was purchased by Nasdaq listed Jazz Pharmaceuticals for $7.2 billion, in a cash and share transaction representing a 50% premium to the previous closing price.
Research by Prohibition Partners estimates that around 340,000 patients will be taking cannabis-based treatments by 2024 creating a market worth £2.3 billion.
LOWER RISK EXPOSURE
As we have discussed the biggest cannabis companies are in foreign territories and quoted in foreign currencies. This adds corporate governance and foreign exchange risk to the already considerable regulatory and business risks.
The UK quoted companies involved in the sector are relatively small and new to the market, so would be considered only suitable for investors with a strong risk appetite.
A lower risk approach is to invest via an exchange traded fund which provides a diversified portfolio and reduces individual stock risk.
Rize Medical Cannabis
and Life Sciences ETF (FLWG) $9.46
This fund has delivered a 125% return over the last year.
The largest holdings out of a total of 22 include GrowGeneration Corp which operates specialty garden centres in the US(23.2%), GW Pharmaceuticals (18.8%), Amyris which is an industrial biotechnology company (18%), and The Scotts Miracle Gro Company which is the largest provider of gardening and lawncare products in the US, including cannabis growing equipment, (11%).
The fund is manged by Davy Global Fund Management and has an ongoing charge of 0.65% a year. This is relatively high for an ETF but reflects the greater complexity of the product relative to more traditional trackers offering exposure to mainstream indices like the FTSE 100.