Cannabis stocks are being punished again this year, but there’s more to the story and the outlook remains compelling for ETFs, such as the Global X Cannabis ETF (NASDAQ: POTX).
POTX, the first cannabis fund from Global X follows a benchmark that holds “companies involved in the legal production, growth, and distribution of cannabis and industrial hemp, as well as those involved in providing financial services to the cannabis industry, pharmaceutical applications of cannabis, cannabidiol (i.e., CBD), or other related uses including but not limited to extracts, derivatives or synthetic versions,” according to Global X.
Amid the coronavirus crisis, cannabis investors are facing a dichotomy.
“Amid widespread COVID-19-related retail store closures, many cannabis dispensaries received ‘essential business’ designations,” writes Global X analyst Pedro Palandrani in a recent note. “This allowed cannabis consumers to stock up on medicinal and recreational cannabis, fueling strong sales figures despite a tumultuous Q1 2020. Yet even with strong sales momentum, cannabis stocks broadly suffered during the quarter amid heightened market volatility.”
POTX Can Bounce Back
The global cannabis market is expected to grow to $630 billion by 2040, compared to $12 billion today. The cannabis industry is expected to expand into a $22 billion hemp-derived CBD product market in 2022, up from $591 million in 2018. Looking ahead, Canada’s cannabis industry is projected to grow six-fold in market value by 2026, up from $1.6 billion in 2018.
Interestingly, a case can be made that cannabis, which to date is viewed as a volatile investment, is actually a consumer staple – a more docile asset class.
“Legalized cannabis did not exist during the great recession, but recent figures suggest cannabis sales share similar characteristics with alcohol and tobacco,” says Palandrani. “Canada and most U.S. states with legalized cannabis industries declared dispensaries as essential services, allowing sales to continue throughout the COVID-19 crisis, enabling robust demand to be met.”
Important to the POTX thesis is that even before shelter-in-place directives took hold, marijuana sales were rising.
“While lockdown may have accelerated cannabis demand, cannabis sales were already on an accelerating path. January and February sales numbers in Canada increased 181% year-over-year to C$154 million and 190% to C$150 million,” adds Palandrani. “Estimates from Cannabis Benchmarks for March sales show a spike to C$216 million, more than three times March 2019’s sales of C$59 million.”
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.