According to a November 11 Thomson Reuters report, Cowen & Co. increased its estimates for 2030 for the US cannabis market. Notably, the firm expects the US cannabis market to generate $85 billion in sales by 2030. Previously, Cowen forecast sales to reach $80 billion.
Also, this forecast assumes that the US legalizes marijuana on a federal level by 2030. It appears that Cowen & Co. believes that the market demand for cannabis is rising. Notably, consumers 26 years of age and older are using marijuana and support cannabis legalization.
Additionally, the firm believes that medical cannabis dispensaries could generate higher sales. According to its estimate, US states that have legalized medical marijuana can maximize its AUR (annualized unit revenue) per dispensary at approximately $5 million per door.
Cannabis 2.0 occurred last month, as Canada legalized edibles, vapes, beverages, and concentrates. Many analysts are optimistic that Cannabis 2.0 could add more revenue to the sector by 2020. These new products could hit the stores by the end of this year.
According to Thomson Reuters November 11 report, Cowen & Co. estimated Cannabis 2.0 to add 2.3 billion Canadian dollars in sales by the end of December 2020. The firm also increased the 2020 Canadian TAM (total addressable market) forecast to 5.2 billion Canadian dollars. The previous forecast was 4.8 billion Canadian dollars.
While Cannabis 2.0 hasnt generated sales yet, the expectations for Cannabis 3.0 are already affecting the market. To learn more, please read Cannabis 3.0: Is It on the Horizon?
Investors had been waiting for three of the most important cannabis players earnings. Last week, Canopy Growth, Cronos Group, and Aurora Cannabis (ACB) reported their respective earnings.
Last week, Canopy Growth (CGC) (WEED) reported lower-than-expected results for the second quarter of fiscal 2020. Its revenues of 78.6 million Canadian dollars fell short of analysts estimate of 107.12 million Canadian dollars. The company also reported EBITDA of -155.7 million Canadian dollars. To learn more, please read Canopy Growth Stock Falls after Weak Q2 Earnings.
Cronos (CRON) also reported weaker third-quarter earnings last week. It missed analysts revenue estimates. It also reported EBITDA of -23.93 million Canadian dollars. To learn more, read Cronos Groups Q3 Earnings: Good or Bad News?
Aurora Cannabiss results didnt produce all bad news. Its revenue increased an impressive 153.57% year-over-year but fell short of consensus estimates. Its declining revenue growth led to EBITDA of -39.67 million Canadian dollars. To learn more, read Aurora Cannabis: Good or Bad News for Its Q1 Earnings?
Cowen & Co. gave outperform ratings to Aurora Cannabis, Canopy Growth, and Tilray stock. Cowen increased its guidance for the sector before Aurora and Canopy Growth reported their respective earnings. Analysts dont expect Cannabis 2.0 to show any results before next year.
In my view, Cowens outperform rating for these stocks remains unchanged despite their weaker results. After Canopy Growths results, the firm reduced its target price for CGC stock to 30 Canadian dollars from 40 Canadian dollars. To learn more about Canopy Growths ratings after its earnings, please read Canopy Growths Post-Earnings Targets and Ratings.
According to a survey by Pew Research, two-thirds of Americans now support marijuana legalization. So, we can see more states moving toward voting in favor of legalization. Although marijuana legalization has support from Democrats, it still faces notable opposition by Republicans. The survey also showed that 55% of Republicans favor federal legalization while 44% oppose it.
Morningstar Research also expects these companies sales growth to increase ninefold by 2030. The firm noted, We believe this large, underserved market will provide top-line growth and fixed-cost leverage for cannabis companies, supporting a green rush through at least the next decade.
Morningstar expects Connecticut, New Hampshire, New Jersey, New Mexico, New York, and Rhode Island to be the next states to legalize adult-use marijuana.
The sector took a hit after these prominent cannabis companies reported their earnings. The North American marijuana industry, as tracked by the Horizons Marijuana Life Sciences Index ETF (HMMJ), declined 17.1% last week. Cronos Group stock closed with a loss of 26.2% last week. Respectively, Canopy Growth and Aurora Cannabis stock declined 28.5% and 28.3% last week.
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Investing in exchange-traded funds (ETFs) can be a great way for investors to diversify their portfolios without having to individually buy several different stocks. That might be especially important when it comes to the marijuana industry, where there may be concern about individual companies, but the sector as a whole still shows a lot of growth potential. Thats where an ETF could help minimize the company-specific risk while giving investors the ability to benefit from long-term gains in the sector.
One of the better-known ETFs is the Horizons Marijuana Life Sciences Index ETF (OTC:HMLSF), which holds some of the top players in the industry, including Canopy Growth (NYSE:CGC) and Aurora Cannabis (NYSE:ACB), among many others. Unfortunately, because those big companies have made up a sizable proportion of the ETF (Canopy at 10.8% and Aurora at 9.5%), theyve also exposed the fund to their struggles.
The ETF has fared no better and no worse than Canadas top two pot stocks; it has fallen 31% since the beginning of the year, which is in line with both of their performances thus far. On a positive note, the ETF has been able to avoid the collapse thats crippled CannTrust (NYSE:CTST) investors by having a more diversified portfolio, and while it might have included the stock in the past, it doesnt today.
The downside of an ETF like Marijuana Life Sciences is that its diversification will also ensure that an outstanding performance by an individual stock wont have a big impact on its overall returns. If we look at the past two years, from November 2017 through to November 2019, the Horizons ETF has still fallen by about 15%. This time, those returns are worse than the 4% gain that Aurora generated over that period and nowhere near Canopy Growths returns of 36%.
An alternative to the Horizons ETF for investors is the AdvisorShares Pure Cannabis ETF (NYSEMKT:YOLO), which holds a much more diverse set of cannabis stocks, including big names in the U.S. like Curaleaf Holdings (OTC:CURLF). With Canopy Growth and Aurora making up just 2.9% and 1.8% of the funds holdings, respectively, theres less exposure to the bigger names in this ETF.
Unfortunately, since its inception back in April, the fund hasnt fared much better than the Horizons ETF, with both funds declining close to 50% as of Nov. 1. That being said, neither ETFs suffered the 60% loss that Aurora did or the 56% decline that Canopy Growth experienced during that time.
While theres definitely evidence to suggest that these ETFs could have saved you from some of the larger losses incurred by some cannabis stocks this year, an argument could be made that theres simply not enough of a benefit there. Losing 50% rather than 60% might not have provided investors with much consolation for whats been a dreadful year for the industry on both sides of the border.
The big danger when investing in marijuana stocks is that they can and often do move together. A bad earnings performance by one of the bigger stocks like Aurora or Canopy Growth could spark concerns for investors in others. After all, if those larger companies are running into problems, the smaller players could face similar challenges.
The marijuana ETFs listed above can give cannabis investors a lot more diversification and a bit more safety. However, generally, cannabis investors should be aware that the risk of investing in cannabis stocks, especially at this juncture of the industrys growth, is still very high. And regardless of how many different types of stocks are held in an ETF, it cant entirely protect your portfolio if things go bad.
Investors would be better off doing the research and finding one good marijuana stock to invest in, whether it be Aurora Cannabis, Canopy Growth, or some other company, rather than holding an ETF when it may not be advantageous to do so.