Cannabis has jumped back into the investment headlines after pot stocks became the latest topic of talk among the same Reddit group that set shares in GameStop soaring.
Nasdaq-listed Tilray was the big mover, with its stock jumping more than 50% on 10 February, and pre-market indicators imply another 14% rally when the US market opens on 11 February.
In addition to being caught up in the Reddit-inspired excitement for any stock cannabis-related, Tilray also excited the market with a deal to distribute medical marijuana in the UK, firing hopes of growth outside of North America.
Other overseas stocks grabbing investors’ attention were $26 billion Canopy Growth (up 6%) and $10.5 billion Aphria (up 10%).
RELAXING THE US POT LAW LANDSCAPE
Cannabis stocks are also hot on expectations that Democrats will push for widespread legalisation across the US. This would expand the state-by-state relaxing of laws seen so far.
The drug’s use is legal up and down states along the West coast, in parts of New England (Maine, Massachusetts, Vermont), in New Jersey and Washington, and in a handful of mid-Western states including Colorado, Illinois and Michigan.
UK CANNABIS STOCKS IN DEMAND
MGC Pharmaceuticals (MXC) has just become one of the first medical cannabis developers to float on London’s Main Market and its shares have already risen 146% in the three days since listing in the UK. It already had a stock listing in Australia.
The company raised £6.5 million, valuing the business at £33.7 million upon listing. Given last year’s (to 30 June 2020) A$11 million EBITDA (earnings before interest, tax, depreciation and amortisation) loss on A$2 million revenue, investors can expect cash calls to be a regular feature in the coming years.
CANNABIS FUNDS ARE ALSO SOARING
London-listed exchange-traded funds Rize Medical Cannabis & Life Sci ETF (FLWG) and Medical Cannabis and Wellness UCITS ETF (CBDP) have jumped 50% and 46% respectively so far this year.
Bloomberg reported that the top performing US ETFs so far in 2021 track the cannabis industry.
The Global X Cannabis ETF, Cannabis ETF and Amplify Seymour Cannabis ETF have returned more than 90% year-to-date, according to data compiled by Bloomberg. These three non-leveraged products have massively outpaced the 4% gain in the S&P 500 Index.
The Global X Cannabis ETF extended this year’s surge to almost 130% with its largest holdings Tilray and Aphria in middle of a $3.8 billion merger agreed in December. Both have skyrocketed in 2021: Aphria is up 258% and Tilray has soared by 610%.
ARBITRAGE OPPORTUNITY SPOTTED BY THE PUBLIC
The relative performance gap between Tilray and Aphria has opened an arbitrage opportunity, which appears to have got the Reddit crowds piling in.
Arbitrages are where investors try to profit from playing off the prices of related assets. This is high risk stuff that hedge funds try to pull off. Ordinary investors could easily rack up huge losses but that has not stopped many trying.
Longer-term, there is scope for real health benefits to emerge and underpin some cannabis investments. There is already some evidence but much more research is needed, and that research and development and the clinical trials required will not come cheap.
