In one expert’s estimation, the state of the market has been “symptomatic of a general risk-off appetite in equities” rather than a reflection on the value of individual companies.
In the midst of a summer slump for the cannabis industry, one financial expert says opportunities for investors are continuing to spring up in the US as the possibility of the full legalization of cannabis approaches.
Elliot Johnson, chief operating officer at Evolve Funds Group, told the Investing News Network (INN) that, despite the struggle for public cannabis companies seen since the end of Q1 2019, the industry is beginning to find its footing as players in the space establish themselves in markets across the US.
“If you look at the North American Marijuana Index, last year it had three draw downs that were roughly around 40 percent in depth, and in each case it came back to new highs,” Johnson told INN.
The investing executive said so far this year there’s only been one similar drop after the end of March.
This summer has been full of volatility for the cannabis stock market, as a variety of scandals and changes have affected the confidence of investors, at least in the short term.
Such scandals include the case of CannTrust Holdings’ (NYSE:CTST,TSX:TRST) illegal growing scheme, a stern warning for multi-state operator (MSO) Curaleaf Holdings (CSE:CURA,OTCQX:CURLF) for its hemp-derived cannabidiol (CBD) products from the US Food and Drug Administration and the firing of former Canopy Growth (NYSE:CGC,TSX:WEED) CEO Bruce Linton.
In Johnson’s estimation, however, the general state of the market has been “symptomatic of a general risk-off appetite in equities” rather than a direct reflection on the value of individual companies.
“I think it’s been a good growing up summer for the industry,” he said, mentioning that the issues the cannabis space has seen in recent months have served to reinforce the importance of upholding regulations and maintaining good internal governance practices, while reminding investors to ask questions about management policies.
Johnson reaffirmed his optimism for American cannabis market trading, saying investors should carefully consider their options in the US due to the significant gap in valuations. Canadian companies are trading at about 21 times the valuation of their American counterparts, according to Johnson.
He attributed the discount in price to the “legal limbo” currently playing out in the US.
The passing of the farm bill in 2018 opened the doors to the rush for cannabidiol products thanks to the legalization of hemp and its derivatives. However, despite this advancement, the legal status of the drug is still dealt with largely on a state-by-state basis.
It’s the companies in the US that are focused on product branding and developing brand loyalty, he said, that will offer investors some of the most interesting opportunities.
“If you’re buying an edible or a CBD-infused beauty product, you’re probably not going to be particularly concerned about where the original source material comes from,” said Johnson, adding that companies with strong consumer-facing brands will be the best positioned in the face of federal cannabis legalization.
Another advantage for the current landscape in the US is the ability to market products more freely, unlike in Canada where cannabis products are under strict packaging guidelines, a factor Johnson said has directly impacted Canada’s first-mover advantage.
“I think the approach that’s being taken here is to treat cannabis the way we treat alcohol, which is not widely advertised and distribution of alcohol is not as widely deregulated,” Johnson told INN.
Though it’s not legal at the federal level, recreational cannabis in the US is legal in 11 states, with the most recent addition to the list being Illinois, as the midwestern state will open its program in January 2020. Medical marijuana is legal across 33 states.
Johnson said Evolve often uses California as an example of the size and dominance of the American cannabis market.
When it comes to stocks, the financial expert, who also manages both cannabis exchange-traded funds (ETFs) for Evolve, said the real hitmakers in the country are MSOs. He called them “the safest bet” for investors looking to get a piece of the market.
Johnson praised MSO firms like Curaleaf Holdings and Harvest Health & Recreation (CSE:HARV,OTCQX:HRVSF) as prime examples of efficient execution across several different legal frameworks.
“They have been able to effectively do a startup 10 times over,” he said.
USMJ features cannabis giants like Canopy and Charlotte’s Web Holdings (TSX:CWEB,OTCQX:CWBHF) among its largest holdings. However, the fund also has a large focus on American players and features Curaleaf Holdings and Cresco Labs (CSE:CL,OTCQX:CRLBF).
Currently, a little over half of USMJ’s holdings are companies based in the US.
Johnson estimates it will only be a matter of time until the US joins Canada with full sweeping legalization, after which he said investors would see a “significant repricing” of American cannabis companies.
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Securities Disclosure: I, Danielle Edwards, hold no direct investment interest in any company mentioned in this article.
Editorial Disclosure: The Investing News Network does not guarantee the accuracy or thoroughness of the information reported in the interviews it conducts. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence.