When Canada legalized recreational cannabis in October 2018, Shark Tank host Kevin O’Leary had stated that he would never invest in cannabis stocks. In an interview with Yahoo Finance, the Chairman of O’Shares ETF Investments noted, “Never would I touch this. Never.” He added, “When you invest in a Schedule 1 narcotic, you are at risk to breach the RICO statutes of aiding and abetting the transfer of a Schedule I narcotic across state lines.”
The DEA (Drug Enforcement Administration) classifies marijuana and cannabidiol (or CBD) as Schedule 1 drugs along with heroin and ecstasy. As an institutional investor, O’Leary stated that he had no option to invest in the cannabis space. Further, he noted that 99% of institutional investors are avoiding the sector.
However, in December 2018, United States legislators legalized hemp with the passage of the 2018 Farm Bill. Hemp is similar to marijuana, from which CBD derivatives can be extracted. However, it does not possess psychoactive ingredients such as THC.
The US market becoming attractive for cannabis players
Although only 11 states have legalized recreational cannabis, and 33 states have legalized medical cannabis, the United States is the largest cannabis market in the world. After hemp was legalized at the end of 2018, CBD-derived products are the only way for cannabis companies to enter the US market at present. Multiple companies such as Canopy Growth (WEED) (CGC), Cronos Group, and Aurora Cannabis are looking to expand their hemp business in the US.
BDS Analytics and Arcview Market Research estimate the US hemp-based CBD market could exceed $20 billion by 2024. However, in combination with THC products, the market is expected to rise to $45 billion during the same period.
Other non-cannabis players are jumping to capture the growing US cannabis market. Recently, Arizona Beverages announced that it would partner with Dixie Brands to manufacture and sell THC-infused vape pens and gummies.
In June 2018, Lagunitas Brewing introduced two versions of cannabis-infused sparkling water called Hi-Fi Hops. Constellation Brands (STZ), the owner of Corona and Modelo, acquired a 38% stake in Canopy Growth (WEED) (CGC).
Growth in institutional investments
There has been steady growth in venture capital investments in the cannabis space, with over $1 billion invested in the sector in 2018. Earlier this year, MGO | ELLO Alliance reported that the investments from venture capital firms reached $1.26 billion by mid-May, spanning 80 deals.
The Evolve U.S. Marijuana ETF (USMJ.NE), managed by Elliot Johnson, launched in April. This ETF focuses solely on US cannabis stocks, and it initially held a stake in 38 US cannabis companies.
Horizons ETFs also entered the US cannabis sector with the Horizons U.S. Marijuana Index ETF (HMUS.NE). You can also gain exposure to US cannabis stocks by investing in the ETFMG Alternative Harvest ETF (MJ).
Should O’Leary reconsider?
After having a difficult fourth quarter of 2018, cannabis stocks have performed well this year. Since the beginning of 2019, the ETFMG Alternative Harvest ETF (MJ) and the Horizons Marijuana Life Sciences Index ETF (HMMJ) have returned 14.5% and 17.7%, respectively.
As cannabis is still prohibited at the federal level, banks doing business with cannabis companies could attract serious penalties. As a result, the majority of the cannabis business uses cash. However, this landscape should change with the passage of the SAFE (Secure and Fair Enforcement) Banking Act, which would allow banks to offer services to cannabis-related businesses. So, the SAFE Banking Act would allow banks to lend to cannabis companies that need a capital injection to expand their operations.
We expect the passage of the SAFE Banking Act and an increase in the number of states legalizing cannabis to unlock the growth potential in US-based cannabis companies. Where does this trend leave O’Leary’s avoidance of cannabis stocks?
In a June interview with Kitco News, O’Leary noted, “I would invest a lot in [cannabis]. I have no interest in the recreational side…I’m not into taking drugs. I want to see the medicinal side. I want to invest in that.”
If you are interested in reading more about the cannabis sector, please check out Market Realist’s Investing in the Cannabis Industry.