It’s been more than two years already since the Cannabis industry started taking the spotlight in both mainstream and financial media. By now, the industry takes no one by surprise, and it is easy to understand why. Evangelists and contrarians alike can agree that, given the multiple applications and use cases around Cannabis, together with the fact that the industry continues to get more liberalized, the Cannabis industry offers immense potential.
High expectations but long-term delivery
Despite all the news surrounding Cannabis stocks, market tailwinds have negatively impacted some of these companies. Cannabis stocks, when measured through the BITA Global Cannabis Index, have underperformed the overall market by 70,1% over the last year.
However, a major catalyst has been the absolute mispricing of Cannabis IPOs by investment banks trying to ride the hype. Experts argue that despite the negative performance, at current valuation levels, the industry offers again potential for growth and appreciation.
2020 and Coronavirus striking a “blow”?
Coronavirus has impacted many industries, and the Cannabis sector is not an exception. Aggressive expansion by some of the leading companies has been followed by regulatory run-ins and vows to pull back and focus on profit and cash preservation.
On the positive side, as governments-imposed lockdowns, reports indicated a surge in cannabis demand, as medical marijuana customers stock up on prescriptions and recreational customers loaded up on something to make the lockdown a little more mellow.
Furthermore, some of the largest Cannabis-related companies, biotechnology, and pharmaceutical companies, have been able to weather the crisis better than most firms.
Outstanding features of the BITA Global Cannabis Giants Index (BGCANG)
The index captures the Gross Total Return Performance of the 20 largest publicly listed companies with direct revenue exposure to the cannabis industry. The index invests in companies like:
Given the way the market has developed and the regulatory landscape, the index invests primarily in Canadian and US-based companies. However, its mandate is global, so as the industry expands in Europe and Asia, and regulatory bodies continue to open its approach, more European and Asian companies might start becoming constituents.
4 factors to look into the future
Aside from the inherent hype that surrounds the Cannabis industry, there are four key factors that many experts agree are most likely to drive the industry going forward. These are Technology, Product Diversity, International Expansion, and Displacement of Black Markets.
Technology: The industry’s long-term sustainability lies primarily behind medical products. From production companies applying engineering to maximize the strength of certain components to biotechnology companies increasing investments in research and trials and becoming more experienced, the conditions are set for growth in the number of medical applications of Cannabis. Cannabinoids have been proven to have a positive impact on the treatment of a wide range of ailments. Researchers are exploring its potential to tackle such enduring problems as epilepsy, Parkinson’s disease, anxiety, depression, and even breast cancer.
Product Diversity: Cannabis is a rich source of CBD or Cannabidiol, a non-psychoactive compound exhibiting a myriad of health and medicinal benefits without inducing the feeling of being “high” or any addictive behaviors. As this component can be used in the productions of various medical and non-medical products, growers have been engineering a large variety of strains, to optimize certain components and increase its applicability across industries and products.
International expansion: Today, Cannabis recreational consumption and, most importantly, production has been legalized in several countries. This can be evidenced by the fact that large companies like Aurora Cannabis, is now present in 22 countries. This regulatory wave is expecting to continue, with countries like Luxembourg already announcing liberalization of the Cannabis market over the next years.
Displacement of Black Markets: As more jurisdictions loosen their regulations and some cases legalize its recreational usage, experts concur that a significant chunk of the black-market revenues will be absorbed by large corporations, like those present in the main Cannabis Stock Indexes.
Passive investing as a way to reduce volatility
Cannabis stocks are volatile. When measured on a one-year horizon, even a large company like Tilray has experienced an annualized volatility of 134,2%, compared against an annualized volatility for the S&P 500 index of 33.7%.
By following a passive investing approach, investors can allocate capital to one of the most promising investment themes while reducing the overall risk. The BITA Global Cannabis Giants Index helps investors to achieve a reduction in issuer risk as well as overall market volatility.
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