Let’s just cut to the chase and say it: The cannabis sector has massively underperformed in the current year.
Indeed, the world's largest cannabis ETF--ETFMG Alternative Harvest ETF (NYSEARCA:MJ), with over $1B in assets under management–has been a major laggard in an otherwise bullish market for equities, managing a paltry 4.7% return YTD vs. 15.9% by the broad market S&P 500 Index.
The sad fact is that many businesses in this space are likely to remain subject to volatility and wild swings thanks to the commodity’s mixed legal status.
Investing in the cannabis sector is a real exercise in patience and calls for a strong tolerance for risk. The harsh reality is that despite the clear intent by a cross-section of lawmakers to have cannabis legalized or at least decriminalized, it might be several more years--at the very least--before legal weed finally wins Federal approval, thanks to heavy resistance mainly by Republican lawmakers in the Senate.
The good news: Despite the current uncertainty over federal legalization of cannabis, U.S. cannabis sales are still growing at a healthy clip, and are set to hit ~$41.3B in 2026, as per Reuters reports.
Legal cannabis sales approached $17.6B in 2020, good for a healthy ~45.5% YoY growth, and the market is set to expand further as more and more states clear legal hurdles against the use of cannabis. Meanwhile, despite the current legal overhang, Cantor Fitzgerald projects U.S. marijuana sales to approach $36B in 2023.
Although the cannabis sector has underwhelmed this year, here are some standout performers in a sea of mediocrity:
#1. MedMen Enterprises Inc.
Market Cap: $393.0M
YTD Returns: 123.8%
California-based MedMen Enterprises Inc. (OTCQB:MMNFF), through its subsidiaries, operates as a cannabis company in the United States. The company cultivates, produces, distributes, and retails recreational and medicinal cannabis under the LuxLyte and MedMen Red brand names. As of September 15, 2021, it operated 23 stores in California, Florida, Nevada, Illinois, and Arizona.
MedMen shares have been surging after Tilray Inc.(NYSE:TLRY) announced on Tuesday that it acquired a majority of convertible notes giving it a significant equity position in the former subject to federal legalization of cannabis.
Momentum is shifting for MedMen, thanks to the Tilray deal and $100M equity investment announced by the company at the same time.
#2. OrganiGram Holdings Inc.
Market Cap: $724.2M
YTD Returns: 85.0%
Organigram Holdings Inc. (NASDAQ:OGI), is a Canadian marijuana company that, through its subsidiaries, produces and sells cannabis and cannabis-derived products in its home country. The company offers a variety of cannabis products including cannabis flowers, extracts, edibles and oils, beverages, and other cannabis products for the adult recreational market under the Edison Reserve, Edison Cannabis Co., ANKR Organics, and Trailblazer brands. It also offers medical cannabis products for the medical market.
As a multi-state cannabis distributor, OGI looks set to benefit after the U.S. House of Representatives approved a bill enabling banks to do business with cannabis companies without fear of penalty, as per Bloomberg reports.
The so-called SAFE Banking Act would be a boon for marijuana companies, which have so-far used to deal in cash because of federal restrictions, which implied extra security costs and logistical problems. The measure was approved by voice vote as part of the National Defense Authorization Act (NDAA) for fiscal year 2022.
#3. Cannabis Growth ETF
AUM: $5.1M
52-Week Returns: 94.5%
If you have never heard of this cannabis ETF, there’s a good reason why that is the case: It’s small and relatively new.
Foothill Capital Management is converting its Cannabis Growth Fund (CANIX) mutual fund into the Cannabis Growth ETF (NYSEARCA:BUDX). The company has made this decision as the traditional mutual fund found itself outperforming many Cannabis ETFs, yet not garnering the amount of fund flows one would expect.
BUDX returned 94.5% over the 12 months ended June 30, but only attracted $5.05M assets under management despite launching in May 2019.
So, Foothill has decided to make the fund an actively managed ETF that will trade on the New York Stock Exchange. Another draw: BUDX will have an expense ratio of 0.79%, down from the 1.32% ratio it had as CANIX.
BUDX will presumably have the same top holdings as CANIX did. As of June 30, that included:
- Innovative Industrial Properties at 10.41% weighting
- Tilray weighted at 7.85% and,
- GrowGeneration Corp at 7.81%
However, BUDX is coming into a market dominated by deep-pocketed incumbents such as:
- ETFMG Alternative Harvest ETF (NYSEARCA:MJ) with AUM of $1.1B
- AdvisorShares Pure US Cannabis ETF (NYSEARCA:MSOS) with AUM of $447.8M
- AdvisorShares Pure Cannabis ETF (NYSEARCA:YOLO) with AUM of $267.6M
- Global X Cannabis ETF (NASDAQ:POTX) with AUM of $128.8M
- Spinnaker ETF Series - The Cannabis ETF (NYSEARCA:THCX) with AUM of $128.8M
It certainly won’t be a walk in the park for BUDX, but so far indications are that the fund is on the right path.
