After the steep pullback this year, marijuana stocks and cannabis-related exchange traded funds may look like a cheap play for value investors.
“We think it has been significantly oversold,” Noah Hamman, CEO of the ETF manager AdvisorShares, told Yahoo! Finance.
The AdvisorShares Pure Cannabis ETF (YOLO), the first actively managed cannabis ETF in the U.S., has plunged 35.4% over the past three months.
Technical investors may have noticed that YOLO was trading in oversold territory according to the its relative strength index readings at the end of September and through much of October before rising 7.9% over the past week. YOLO currently shows a RSI reading of 36.3, or just slightly above an oversold level of 30.
On the fundamentals side, regulatory support could help the cannabis industry sprout. Canadian regulators began accepting applications for companies to produce legal cannabis edibles and beverages this week. Other forms of marijuana have already been legal there over the past year.
Hamman argued that the Canadian regulatory changes are a good sign for the nascent industry, along with progress here in the U.S. where Congress recently pass the Safe Banking Act, which would allow banks to handle money from companies involved in legal cannabis without fear of running into trouble on the federal level.
“Each one of those things are signs that tell you that space is becoming more mainstream,” Hamman added. “More companies are going to be looking at it from an M&A perspective, and we think it’s going to provide some interesting returns for investors in the future.”
The changes in Canada is also noteworthy due to the heavy exposure cannabis-related ETFs have to Canadian growers and other businesses. For example, YOLO includes a hefty 51.3% tilt toward Canada, along with 44.6% U.S. and 3.6% U.K.
As the nascent industry matures, there will be more opportunity for a balanced investment approach where an active manager may also have a hand to select opportunities and limit volatility related to full legalization.
“It’s certainly the early, early days,” Hamman said. “There’s a lot more regulatory changes that are coming into play, a lot more legalization that has to come into play, but it’s been an area that we’ve made an allocation to in our portfolio for sure that we think is going to provide significant upside.”
For more information on the marijuana industry, visit our cannabis category.