The cannabis industry is maturing and ready for more growth

According to some estimates the US market for cannabis will reach $18.4bn in 2021 and then grow to $24bn in 2025 with medical use overtaking recreational use as the key growth driver. But key to the medical use as a driver is scientific proof that can convince the FDA of the effectiveness of THC and CBD (read a description of THC and CBD here). Other key growth drivers over time are easier access to financing which is expected as regulation eases and potentially a full-blown legalization on the US federal level. Economics of scale is important in this industry and therefore mergers and acquisitions will be an important driver of shareholder returns in the coming years. Europe is a small market relative to Canada and the US, so there is a considerable upside potential for the industry in Europe. This recent Deloitte industry report is a good read on the different drivers.

Some of the companies in our basket are on reduce-only in our trading systems meaning that they cannot be bought but only sold. IM Cannabis is not available on the platform because we do not have a price feed for the Canada Securities Exchange which is an alternative exchange to Toronto. Why are some of the major companies in the industry listed on a small alternative exchange? The TMX Group, behind the Toronto Stock Exchange, has imposed regulation preventing companies with US cannabis business or assets to list on the main exchange in Canada because cannabis is still illegal in the US on a federal level. As a result, many US business in the cannabis industry has listed on Canada Securities Exchange. But Curaleaf’s Executive Chair Boris Jordan has said recently that they expect US cannabis companies to be able to uplist to major US exchanges if the US Congress passes a cannabis banking reform legislation. If the industry gets these legislations through US Congress it will open for institutional ownership and easier financing, which could create a boom in cannabis stocks.

The table shows the companies that have been included in the cannabis basket. We could only find 20 companies with good direct exposure to this theme and a sufficient market value. The 20 companies are combined valued at $51bn which is a very small investment theme, but that means that the potential is also likely that much greater. The median revenue growth the past 12 months has been 37% and EBITDA is also improving in the industry. Sell-side analysts covering the companies have an average price target that is 26% above the current market price.

Source: Bloomberg and Saxo Group
* These stocks are either on reduce only or not available on the trading systems due to lacking price feed

Key risks

The biggest risks when investing in cannabis stocks are the low liquidity and high volatility in many of the stocks driven by the low ownership ratio by institutional investors. The long-term growth outlook is dependent on a US federal legalization of cannabis for both recreational and medical use, but also legal adoption in international markets such as Europe. The industry is competitive and many of the companies have not yet reached profitability which increases the bankruptcy risks overall in the industry. News stories related to overdoses of misuse for either recreational and medical use could drive negative public relations stories and scrutiny by politicians. The medical use as a key driver hinges on sound scientific proofs of health benefits from cannabis oil and related drugs, which is still uncertain at this point.