The United States marijuana sector, which is comprised primarily of multi-state-operators (MSOs) — vertically integrated companies that cultivate marijuana and own dispensaries and retail distribution in various U.S. states – has rallied over the last month.
The sector, as represented by the Horizons US Marijuana Index ETF (“HMUS”), the only index ETF in the world exclusively focused on the U.S. Marijuana sector, is up more than 40% for the 30 days ended May 22, 2020, while the more widely held Horizons Marijuana Life Sciences Index ETF (“HMMJ”) is flat on the month.
What has created this disparity? For starters, despite not being federally legal, the U.S. marijuana market is projected to be the largest in the world by 2024, according to Arcview Research and BDS Analytics.
According to BDS Analytics and Arcview Research, the U.S. Cannabis market sales closed in on nearly US$12.2 billion in sales in 2019, roughly ten times the sales generated within Canada. Key state recreational markets that have recently come online, such as Illinois and Michigan, will add about US$700 million in annual revenue this year, according to Arcview and BDS Analytics. Those states join other major state markets such as California, Colorado, Nevada and Washington State as key hubs for recreational sales.
The largest publicly traded MSOs are all seeing revenue growth rates rise by double-digits per quarter, according to Arcview Research and BDS Analytics. The growth is exponential, but on a relative valuation basis, these stocks continue to trade at a discount relative to many licensed producers (“LPs”), Canadian corporations or corporations in countries with federally legal status to produce marijuana. This is simply because the legal status of their businesses remain challenged by federal prohibition, and accessing largescale equity financing through both debt and equity is challenging in this environment. In some cases, these constraints are limiting the expansion potential of these companies, resulting in stagnancy.
The COVID-19 crisis, however, has possibly highlighted that the U.S. marijuana industry doesn’t need federal legalization to thrive, and indeed, many of the key stocks held in HMUS have demonstrated exponential revenue growth, which seems to be attracting investors.
The chart from Marijuana Business Daily below shows that in states that don’t rely on tourism sales for marijuana —Nevada (Las Vegas) and Colorado are tourist destinations, and this is a widely studied metric for data providers of marijuana sales — sales have continued to grow during the COVID-19 restrictions. However, calling marijuana business “recession-proof” would be premature. The ability of the sector to grow sales during an environment where most retail is constrained has surprised many.
Adult-use cannabis sales by month and market in 2020:
During April, U.S. MSOs experienced significant rallies in their valuations, with many of the larger MSOs such as Curaleaf, Cresco, Harvest Health and Trulieve generating double-digit returns. If you look at the revenue from a company like Massachusetts-based Curaleaf, for example – which recorded one year sales of US$221 million as at March 2019, nearly triple the US$77.1 million that it brought in the year before, for the same period– those types of revenue numbers exceed those recorded by many of the larger Canadian LPs. For comparison, Ontario-based Canopy Growth’s annual revenue was C$226 million. Curaleaf has about a US$3.2 billion market cap vs. US Canopy’s $5 billion market cap as at May 13, 2020, according to Bloomberg.
Source: Bloomberg as at May 22, 2020.
*Since HMUS Inception: April 17, 2019
The indicated rates of return are the historical annual compounded total returns including changes in per unit/share value and reinvestment of all dividends or distributions and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any securityholder that would have reduced returns. The rates of return shown in the table are not intended to reflect future values returns are not guaranteed, their values change frequently and past performance may not be repeated.
Can the Momentum Continue?
If you compare the revenue generation of the MSOs to Canadian LPs, there does seem to be a disconnect. The Canadian LPs have global footprints, but their primary source of revenue comes from the Canadian market. Building up retail distribution in Canada has been a challenge, as the largest provincial market in the country, Ontario, was slow to roll out independent retailers, such as stores not owned by producers. This has created both supply and demand challenges, but most importantly, it simply has not allowed the Canadian LPs to penetrate the Canadian retail market to the extent that many would have forecast at the dawn of legalization in October of 2018.
What the Canadian LPs do have, though, are listings on major stock exchanges such at the Toronto Stock Exchange, the New York Stock Exchange and the NASDAQ. This means that, by default, they become more widely accessible to investors in North America, particularly through online brokerages. The U.S. MSOs, while based in the U.S., have primary listings on Canadian exchanges such as the Canadian Stock Exchange and the Aequitas Neo, which are more difficult for American investors to access, although some U.S. investors trade these stocks on the overthe- counter (“OTC”) market.
This recent rally may predominantly be the result of Canadian retail investors and OTC investors deploying new capital into the U.S. sector of the global cannabis market. There may also be opportunity in the sector if you consider the potential these stocks might have if they can get a wider investor audience over the next 12 to 18 months.
In the meantime, HMUS is the only ETF focused on exposure to this sector that can provide diversified exposure across all of these names. Similar to the broader story, there will be winners and losers in the U.S. sector, but as the sector grows in aggregate, HMUS could potentially gain meaningful growth from that development.
*Since HMUS Inception: April 17, 2019
Source: Bloomberg, as at May 22, 2020
There are risks associated with this product. HMUS is expected to invest in the Marijuana industry in certain U.S. states that have legalized marijuana for therapeutic or adult-use, which is currently illegal under U.S. federal law. HMUS will passively invest in companies involved in the marijuana industry in the U.S. where local state law regulates and permits such activities, as well as in companies involved in the Canadian legal Marijuana industry. HMUS will not be directly engaged in the manufacture, importation, possession, use, sale or distribution of marijuana in either Canada or the U.S. Please read the full risk disclosure in the prospectus before investing.
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