The cannabis industry is one of the fastest growing industries in the world, and it shows no signs of slowing down, explains Kirk Spano, editor of Fundamental Trends.
With more and more U.S. states legalizing cannabis for both medical and recreational use, the demand for cannabis products is skyrocketing. According to a report by Brightfield Group, the global legal cannabis market is expected to grow from $10.9 billion in 2018 to $66.3 billion by 2025.
The U.S. is leading the way with a forecast of roughly 50 million users by 2025 and $25 billion in revenues. California is the leader in cannabis use and is expected to exceed $7 billion by 2025.
And as the demand for cannabis grows, so does the need for investment opportunities. That’s where cannabis ETFs come in. A cannabis ETF is a type of exchange-traded fund that invests in companies involved in the cannabis industry. This can include growers, processors, product brands, retailers, and more.
Cannabis ETFs offer investors a way to tap into the rapid growth of the cannabis industry without having to pick individual stocks. And with the cannabis industry expected to continue to grow at an extraordinary rate, investing in a cannabis ETF can grow your portfolio like a weed.
I am investing in the AdvisorShares Pure Cannabis ETF (YOLO) which has plummeted in share price the past year. However, as legalization of cannabis use moves forward and the companies can gain normal access the financial system, growth is set to take off. I believe it’s share price will follow.
The past year has been tough for the cannabis industry. A combination of over-hype, unrealistic expectations, and a lack of understanding of the challenges faced by the industry has led to a sharp sell-off in cannabis stocks. This has left many investors feeling frustrated and even despondent about their investment prospects in the sector.
But it’s important to remember that every new industry goes through growing pains. It’s natural for there to be bumps in the road as the industry matures. And while the past year has been difficult, it’s also important to remember that the long-term prospects for the cannabis industry remain extremely bright.
While we cannot perfectly pick bottoms in any investment, the charts give us a clue; our volume study suggests that selling is almost exhausted for YOLO. In addition, the RSI using the longer weekly time frame is very oversold. It is rare that this holds long and price usually rises soon after meeting such an oversold condition.
Uncertainty over the broader stock market due to Federal Reserve tightening is a concern, but YOLO has already been beaten up and has limited downside, especially long-term as legal adoption continues and financial normalization occurs supporting growth rates as expected.
As with any investment opportunity, it’s not what the market knows that gives you a compelling opportunity, it’s what the market is missing or ignoring. In the case of the cannabis industry, stock market investors are missing the rapid pace at which the remaining cannabis companies are and are becoming profitable.
What’s even more compelling is that the profitability is developing despite many states not yet legalizing marijuana, nor there being any passed Federal legislation on allowing cannabis companies full access to the financial system. Investing before all the unknowns are known is the key to getting a low price.
AdvisorShares Pure Cannabis ETF, a global fund, also holds a 34% stake in the AdvisorShares Pure U.S. Cannabis ETF (MSOS), which is U.S.-only and invested primarily in MSOs — multi-state operators. According to AdvisorShares, YOLO holds this stake in MSOS for ease of investing in U.S.-based cannabis companies.
To be clear, there is an element of risk with cannabis in this pre-full legalization period. Legislation could go against them, though a slow pace of positive adoption is far more likely.
Fundamentally, I think these companies as a group are no worse than fairly valued and I believe they are undervalued by 30-50% versus earnings over a 3-5 year time frame. Do your own analysis, but remember to be forward looking.
Technically speaking, selling pressure seems like it is exhausting. I believe YOLO is a buy right now and I would buy more if it goes down to around $7-8 later. (Disclosure: I/we have a beneficial long position in the shares of YOLO either through stock ownership, options, or other derivatives.)
