The cannabis investment market has shown its resilience through the coronavirus crisis and the second half of 2020 is looking positive, says Nawan Butt of Purpose Investments.
Cannabis is likely to be a key talking point in the US presidential election in November and Butt says a potential win for Democrat Joe Biden would bode especially well for medical cannabis businesses in the US.
Butt, who is portfolio manager of The Medical Cannabis and Wellness UCITS ETF (LON:CBDX) that Purpose runs in partnership with HANetd, is also optimistic about the outlook because benefit from other catalysts on a macro and company specific level as various companies commercialise their medical cannabis and CBD wellness strategies.
“Under current regulations it is difficult to measure the appetite for cannabis investments in the United States. Due to their inability to invest in cannabis, US investors have found the next-best associated growth vertical to capitalise on this opportunity,” says Butt.
As a result, ancillary businesses have seen strong demand from investors through the coronavirus crisis, with large equity capital financings close including Industrial Innovative Properties Ltd (NYSE:IIPR), a leading cannabis greenhouse REIT, and GrowGeneration Corp (NASDAQ:GRWG), cannabis hydroponics supplier.
“Both these financings were completed in excess of their original size, and anecdotally were 5x and 3x oversubscribed respectively. These anecdotes speak to the pent-up demand for growth stocks which is currently unavailable to many investors,” says Butt.
The CBDX Medical Cannabis and Wellness ETF has risen more than 73% since the market’s lows in March, having only just launched in January.
Butt said this was evidence of the cannabis market’s resilience, for what is still a nascent industry, as the sector as a whole experienced a similar fate to other high-growth vertical but has come to outperform broader market indices such as the S&P 500 and the FTSE 100 on a total return basis, with the Medical Cannabis and Wellness Equity Index down 0.9% over six months to the end of June, versus a 23% decline for the Footsie and 3.1% for the S&P.
Disruption of the wider economy under lockdown has not affected almost all of the cannabis sector, as it comes under the umbrella of medical services.
However, within underlying sub-sectors, Butt stresses there has been a differentiation of performance, with the abovementioned ancillary services and companies with arms-length connections to cannabis have seen excess demand from investors in anticipation of progressive cannabis legislations in the US, while pharmaceutical cannabinoids also been boosted as the healthcare sector enjoyed extra attention in the pandemic.
Butt further added: “There are few public companies operating in the CBD wellness space and their immediate shedding of excesses in response to business slowdown has stabilised valuations. Second quarter earnings results will provide us with a better idea of their earnings growth in times of duress, especially in retail.”
The Medical Cannabis and Wellness UCITS ETF, which is listed on the LSE, XETRA and SIX exchanges, tracks a rules-based medical cannabis and wellness equity index from Solactive, consisting of publicly listed companies conducting legal business activities across nine thematic sub-sectors in the medical cannabis, hemp and CBD industries.