Many of those investing online in equities are probably not even aware that marijuana companies are a stock market sector. However, they are, at least in Canada, and have been one of the Toronto Stock Exchange’s success stories of 2017. Marijuana stocks even have their own index – The Canadian Marijuana Index – which includes 18 different listed companies. Medical marijuana, which requires a doctor’s prescription, has been legal for some time in Canada, with regulation on medical access in place since 2001.
However, the big driver of the Marijuana Index this yearis impending wider legalisation due to pass into law in the summer of 2018. The couple of days of post-Christmas trading have seen particularly spectacular gains. The Cannabis Index has risen by 18% this week and Canopy Growth Corp., the country’s largest cannabis producer, has gained over 20%.
Significant foreign investment has been attracted into the industry and the biggest, most liquid stocks, have been the primary beneficiaries. Chris Damas, the editor of the BCMI Cannabis Report describes the current capital inflow as “like a firehose into a straw, because they are going to go for the big names, the liquid names”. Damas also strikes a cautionary note by highlighting the fact that while the value of capital being invested in Marijuana stocks is quantifiable, at this point in time the potential upside isn’t.
With very limited case studies of a legal marijuana market available, it is difficult to accurately predict the Canadian market’s revenue potential. California is also set to legalise the recreational use of Marijuana on January 1st.
The huge gains of the past couple of days, however, are the result of the first Marijuana-industry ETF going live on the NYSE Arca exchange. The ETF holds several of the larger Canadian cannabis companies such as Canopy Growth, CannTrust and MedReleaf. While, as a result of its heavier weighting in the ETF, Canopy had a huge 20% rise, CannTrust and MedReleaf also gained close to 8% and 5% respectively.
Currently 82 licenses to grow or sell medical marijuana have been approved by regulator Health Canada. However, that number is expected to grow significantly in order to meet the growth in demand expected to result from legalisation.
For those investing online and considering ETFs or individual stocks for a play on marijuana legalisation, there is a very interesting opportunity. However, there is also significant risk. Valuations will take some time to develop in line with solid fundamentals in such an immature market and there is a bubble danger. Nonetheless, just how ‘high’ the marijuana market could go is an enticing prospect for a the higher risk section of an equities portfolio for the coming year!