Robinhood Investors Are Missing Out on This Huge Cannabis Opportunity

Cannabis stocks have been soaring recently the back of the U.S. election and a largely positive third-quarter earnings season. Not only do investors believe an incoming Biden administration could potentially roll back some marijuana prohibition provisions, but U.S. cannabis stocks have also reported some excellent sales growth in their third-quarter earnings.

Unfortunately, investors on the popular Robinhood platform can't participate in a good part of the industry -- in fact, the best part. Yet here's how investors on the platform can still gain access to this potential boom.

Robinhood investors can't directly invest in U.S. cannabis MSOs. Image source: Getty Images.

Robinhood doesn't offer U.S.-based multistate operators

Currently, Robinhood does not offer trading on Canadian exchanges, or most stocks that trade over the counter in the United States. Over-the-counter stocks are generally less liquid than stocks that trade on major U.S. exchanges and thus bear some higher risks, which is why certain platforms don't allow you to trade them.

In an ironic and somewhat absurd twist befitting the U.S. government's continued prohibition of cannabis, U.S.-based cannabis operators can trade on the Canadian exchanges, and their American depositary receipts trade over the counter in the United States. By contrast, Canadian cannabis companies actually trade on U.S. exchanges, since they are "legal" businesses up in Canada.

Hey, no one ever said the war on drugs made sense.

Unfortunately, this nonsensical arrangement is hurting the ability of Robinhooders to profit, since U.S. multistate operators (MSOs) look to be much, much better investments than their Canadian peers.

A quick comparison

To see how much better things are looking for U.S. MSOs, consider the recent data from a sampling of major cannabis companies' third-quarter results. Three of the largest U.S. MSOs are Curaleaf Holdings (CURLF -2.69%), Green Thumb Industries (GTBIF -1.37%), and Trulieve (TCNNF -3.22%). They are growing much more quickly and are more profitable than their large Canadian peers, several of which occupy the 100 most popular Robinhood stocks today. These include Aphria (APHA), Cronos Group (CRON -0.41%), Canopy Growth (CGC 20.65%), Aurora Cannabis (ACB 12.87%), and Tilray (TLRY). 

Data sources: company quarterly filings. YOY=year-over-year.

It's pretty clear what the better businesses are here. U.S. MSOs are seeing not only exploding growth but also higher margins. This is because Canada, while legal, largely dropped the ball in rolling out licenses for dispensaries. That has not only plagued the Canadian companies in terms of overproducing more than they can sell because of the logjam, but it has also allowed the black market to continue unabated in many parts of the country.

Meanwhile, it appears U.S. consumers are embracing legal cannabis wherever they can, either recreationally or with a medical prescription, and happily flocking to legal stores. It's a real shame that Robinhooders can't buy into what is clearly a better part of the industry, especially since there is clear demand for cannabis industry exposure, with seven of the top 100 most popular Robinhood stocks being "lesser" Canadian cannabis companies.

But there may be a way...

Fortunately, all hope is not lost for Robinhooders. A new exchange-traded-fund called the AdvisorShares Pure US Cannabis ETF (MSOS -2.84%) trades on the NYSEArca exchange and is therefore available for Robinhooders to trade. The three aforementioned large U.S. MSOs are among its top holdings, giving Robinhooders broad and diversified exposure to the booming U.S. cannabis scene.

Pure US Cannabis ETF could be worth a look right now even after its recent run. The House of Representatives just voted to legalize cannabis at the federal level on Friday. While the bill has little chance of being taken up by the Republican-controlled Senate, it's still an unprecedented vote. In addition, some cannabis executives think there is a good shot of passing cannabis banking reform in the new administration, and possibly even the STATES Act, which would insure that companies complying with state cannabis laws wouldn't be prosecuted.

Should that happen, I'd expect U.S. MSOs to continue higher, given their strong growth and profitability. For Robinhood investors, the Pure US Cannabis ETF may be worth checking out heading into 2021.