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It’s World Marijuana Day, otherwise known as 4/20 in North America. It is an appropriate time to catch up on the progress of the much-discussed medical cannabis sector.

Over the last couple of years investors in cannabis stocks have been working through a ‘price discovery phase’ for the cannabis sector as it becomes increasingly legalised and regulated. At times it may have seemed like a roller coaster ride, but this has been because it is a new sector. Nothing has stood still for long.

As Europe and North America have been locked down in the coronavirus pandemic, cannabis stocks have been sold off, but medical cannabis is now playing an important role in the treatment of patients, and has been deemed an essential service in Canada and 21 American states.

“This silver lining has defined what we believe to be the valuation floor for medical cannabis,” says Greg Taylor, CIO and portfolio manager at Canada-based fund manager Purpose Investments. “The support of regulatory bodies in providing access to patients is the affirmation investors have been waiting for to finally start believing the secular story again. There is no doubt that the sector will continue to trade with a high beta as financial markets find their feet. But it’s essential to maintain context of the precedent being set here.”

Taylor says the more direct impact on cannabis stocks of an economic downturn is the bankruptices in the Canadian adult-use cannabis sector, which are dominating the headlines at the moment. He sees that trade as “single jurisdiction, overcrowded [and] under-capitalized.”

Purpose Investments launched a medical cannabis ETF on the London Stock Exchange in January, which follows the Medical Cannabis and Wellness Equity Index. Launched in conjunction with white lable ETF specialist HANetf, the fund invests in publicly-listed companies conducting legal business activities across nine thematic sub-sectors in the medical cannabis, hemp and CBD industries.

The fund owns companies like Charlotte’s Web (TSX: CWEB), the biggest public hemp company in the US, which recently agreed to acquire Abacus Health Products (CSE: ABCS), which owns the only FDA-approved CBD topical products in the US market. With the acquisition, Charlotte’s Web now represents approximately 35% of the market for CBD in the food, drug and mass retail channel in North America.

UK eases marijuana import restrictions

Also worth mentioing on World Marijuana Day is the fact that the UK has begun easing import restrictions for medical cannabis, a move that is expected to improve the numbers the market has seen to date. Licensed wholesalers of medical marijuana are now able to import larger quantities of cannabis-based products and hold supplies for future distribution. As all cannabis in the UK is imported, this should allow patients to get treatment within days rather than months.

What of the outlook for the cannabis sector as we sail into what looks like it will be a global recession? Taylor at Purpose Investments anticipates plenty of negative media coverage of the sector as the press seeks to milk a ‘fall from grace’ story for marijuana stocks, but he says it is important for investors to distinguish between the medical cannabis and adult use cannabis markets.

The adult use market has taken a pounding as too much capital was applied too fast and this has meant too much capacity and silly compensation packages as well as a severe lack of long term planning. Too much money, and too little sensible management. By contrast, the medical cannabis market has continued to see much more stable patient growth and consistent progress in pharmaceutical formulation.

Investors need to be able to sift the noise for the growth stories that this sector undoubtedly contains, especially in the high quality medical and wellness sub-sectors.

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Please note this article does not constitute investment advice. Investors are encouraged to do their own research beforehand or consult a professional advisor.

Graeme Andrew

Graeme Andrew

Graeme is Head of Technology at the Armchair Trader. He has worked in online financial investment publishing since 2000 as a website developer, advertising operations manager, data scientist and all-round go-to guy for online technical solutions.

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