There are a lot of interesting investment opportunities today, but perhaps none more exciting than cannabis -- specifically, U.S-based cannabis companies. Though marijuana is still federally illegal, many U.S. companies operating in states where marijuana use is legal are seeing booming financial results. Furthermore, the prospect of potential regulatory rollbacks means U.S. pot companies could also see improvements in their cost structures as well sometime during this administration.
Yet unfortunately, many U.S. investors are shut out from this promising opportunity.
Because cannabis is still federally illegal, the stocks of U.S.-based cannabis companies are only listed on Canadian exchanges or over the counter, as they're not allowed to trade on the New York Stock Exchange or Nasdaq. And many popular brokerages like Robinhood, which is geared toward younger retail investors who would be prime candidates to invest in U.S. pot stocks, don't allow trading on Canadian exchanges or in over-the-counter stocks.
Of course, cannabis is legal in Canada, and Canadian pot stocks are allowed on the NYSE and Nasdaq, and are thus available to all U.S. investors, Robinhooders included.
Since U.S. multi-state operators (MSOs) are by and large superior businesses to their Canadian counterparts, this topsy-turvy state of affairs is really frustrating. Many U.S. retail investors appear to now be chasing stocks of inferior Canadian businesses such as Sundial Growers (SNDL 2.65%) in the hopes of a meme-stock pop.
Fortunately, if you're a Robinhood trader looking for a way to spend some of your $1,400 stimulus check on U.S. cannabis stocks, there's now a new way around this frustrating conundrum.
The case for U.S. pot stocks
Some U.S. citizens are receiving their $1,400 stimulus checks right now, which is a much-needed infusion for many in order to pay their bills and bolster their emergency funds. Of course, these stimulus checks are also going to many who are gainfully employed, and who will either save or invest them.
Provided you've paid your bills and credit card debts, established an emergency fund, and are planning to invest part or all of your stimulus check, there are several reasons U.S. cannabis stocks may be attractive candidates for your investment dollars -- especially for younger investors who can afford to invest in higher-risk, higher-upside securities.
For one thing, the U.S. cannabis market is huge and growing. According to preliminary tax revenue estimates from Leafly, legal U.S. cannabis sales grew 71% in 2020 to around $18.3 billion.
But remember, these are just legal sales. Analysts at Cowen estimate the overall U.S. cannabis market is currently $61 billion when including illicit sales. As cannabis gains greater acceptance as an alternative to alcohol and opioids, Cowen estimates the market will grow to $100 billion by 2030 -- that's 25% higher than the initial $80 billion estimate Cowen made in 2019.
So if cannabis is eventually decriminalized and then legalized in the U.S., this is a market that can achieve technology-like growth, increasing five times over the next decade. While I wouldn't expect legalization in the near term, regulatory rollbacks such as the SAFE banking act or the STATES Act, which would ease banking and tax restrictions, or even the MORE Act, which would decriminalize marijuana, could happen during this term.
We can already see evidence of pot stock hypergrowth in the numbers of several U.S. multi-state operators. For instance, the largest U.S. cannabis operator, Curaleaf Holdings (CURLF -0.55%), just reported its 2020 results. Revenue grew 184% in 2020, while gross margin on cannabis sales increased from 41% to 47%. Adjusted EBITDA surged a stunning 456% to $144.1 million, with EBITDA margin expanding from 10.3% to 22%.
And that's just one example -- Curaleaf's U.S. peers also reported similarly stellar growth throughout 2020. With limited licenses available in many states, many of these first movers enjoy somewhat protected positions with limited competition, allowing them to protect their margins as well.
U.S. MSO results are a stark contrast to Canadian growers like Sundial
This is in stark contrast to Canada's pot companies, which are growing slower, operate in a market just a fraction of the size of the U.S., and have seen gross margin compression after the Canadian market became vastly oversupplied.
Perhaps no one is feeling the pressure more than the smaller players like Sundial Growers. In its quarter ended in September 2020, Sundial actually saw its revenue decrease and gross margin go negative. Through the first nine months of 2020, Sundial racked up 175 million Canadian dollars in EBITDA losses.
While Sundial is one of the worst-performing companies from an operational standpoint, even the best-performing Canadian companies such as Canopy Growth (CGC 3.16%) are reporting much lower growth than their U.S. counterparts. Last quarter, Canopy grew revenue just 23%, with an adjusted EBITDA loss of CA$68 million.
Canopy and Curaleaf will actually generate similar levels of revenue this year, but Curaleaf is growing eight times the rate of Canopy. Even more incredible? Curaleaf is cheaper than Canopy in terms of market cap, at $10.9 billion versus Canopy at $12.9 billion.
Clearly, there are a lot of investors who can only buy the Canadian stocks for their cannabis industry exposure; otherwise there wouldn't be this strange disparity.
But now Robinhooders have a way to invest in U.S. pot stocks
Fortunately, there's a new way for Robinhood investors to get exposure to U.S. cannabis stocks. The AdvisorShares Pure U.S. Cannabis ETF (MSOS -1.15%), launched in September 2020, is an exchange-traded fund (ETF) that purely buys U.S. cannabis companies, with 81.9% of the fund dedicated to U.S. multi-state operators. In fact, Curaleaf is currently the fund's largest holding, at an 11.51% allocation. Only six months after launch, the fund has attracted over $1 billion in assets under management (AUM), and it's up 26.5% year to date, versus just 4.8% for the S&P 500.
The Pure U.S. Cannabis ETF trades on the NYSE Arca exchange, a specialized exchange for ETFs. While headquartered in Chicago, NYSE Arca is a subsidiary of the New York Stock Exchange. The good news is that Robinhood investors and other U.S. brokerages can invest in NYSE Arca securities, including MSOS, finally giving Robinhood investors the chance to gain exposure to U.S. pot stocks.
Risks and fees regarding MSOS
Of course, there are a few potential drawbacks to the Pure U.S. Cannabis ETF. First, it's actively managed, which means that you are counting on portfolio manager Dan Ahrens to make good active management decisions for you. However, based on its current holdings and allocation, I wouldn't worry too much. There are only so many large, high-quality U.S. MSOs, and the fund currently owns all of the best ones that I can see. Though I don't own Curaleaf, I do own Trulieve Cannabis (my brokerage allows OTC trading), the fund's second-largest holding, as well as several other holdings in the ETF.
Second, there's a 0.60% management fee and a 0.74% expense fee for the ETF, so there is some extra cost associated with holding MSOS, as opposed to just buying these stocks outright. Still, that's a relatively modest fee compared with the superior value you're getting in U.S. pot stocks over Canadian pot stocks.
Despite these concerns, the AdvisorShares Pure U.S. Cannabis ETF is an efficient way to get diversified exposure to the U.S. cannabis industry, which could be a fine destination for your $1,400 stimulus check, if you're looking to invest it. Regulations are likely to be rolled back either in part or in whole by the Biden administration, which would greatly benefit these stocks even further. And a record high 68% of Americans favor cannabis legalization. So if you're looking to invest in the cannabis space and your broker doesn't allow you to take part in individual U.S. names, you should definitely consider MSOS as a better alternative to Canada's inferior cannabis companies.