Markets like this can be tricky to navigate. If you have been fully invested in stocks, you are likely feeling good, but may be wary of losing those gains should economic data deteriorate. If you were bearish this year and hung out in cash, you may be feeling some FOMO, but at least you got paid to wait with cash offering its highest yields in over a decade.
Much ink has been spilled on how the long-term potential of AI and its impact on the Magnificent Seven stocks, which are in part responsible for much of the market’s unanticipated gains. While there’s been evidence that the rally has broadened out to include other sectors over the last months, one that’s been left in the trash bin for some time is cannabis.
And, by the trash bin, I actually mean a dumpster fire. Why a dumpster fire? You don’t need to look much further than the charts.
The North American Cannabis Index, which is composed of North American businesses involved with cannabis, is down over 84% in the past five years. Not exactly keeping pace with the S&P 500’s 69% gain over the same period.
Cannabis Stocks have Struggled
Source: Bloomberg Finance, L.P., as of August 31, 2023. Data displayed is the total return.
If the Fire’s Out, Should We Go Dumpster Diving?
However, on August 30, cannabis stocks received a major catalyst when the HHS recommended cannabis be reclassified as a Schedule III drug from a Schedule I. In turn, the North American Cannabis Index delivered a 26% return last week, which was the best weekly since 2020.
While cannabis would remain prohibited at the federal level and the recommendation is not binding, it would no longer be in the same category as drugs like heroin, LSD, and PCP. More importantly to investors, a rescheduling may allow cannabis companies to make federal tax deductions, which are not allowed for companies selling Schedule I or II drugs. This would markedly reduce their effective tax rates, which can be north of 70%, helping to improve their bottom lines.
While this is a welcome sign for cannabis companies, the industry still faces pressures including an increase in the cost of capital. The cannabis industry also has challenges related to an oversupply, continued issues related to limited interstate commerce, and a thriving unregulated market.
Even with these well-known headwinds, weed stocks may deserve another look, especially if the Biden administration continues to push for reforms that would help boost either top revenue or to improve corporate performance.
For investors looking for value in an otherwise expensive equity market, we believe cannabis fits the bill. (While Warren Buffett may take a more sophisticated approach to measuring intrinsic value, it’s hard to say weed isn’t trading cheaply.)
As of August 31, The six largest U.S. cannabis companies by revenue trade at an average price to book ratio of 1.33, while the S&P 500 Index trades at 4.29x. The last time I checked, that's the definition of value. The Roundhill Cannabis ETF (WEED) is the lowest cost cannabis ETF on the market (0.40% expense ratio) and is the only ETF with targeted exposure to the six largest weed companies.
Cannabis Stocks are Trading Well Below the Market
Source: Bloomberg Finance, L.P., as of August 31, 2023. Cannabis stocks represent the average price to book ratio of the six largest US focused cannabis companies.
The performance data quoted represents past performance. Past performance does not guarantee future results. Current performance may be lower or higher than the performance data quoted. The investment return and principal value of an investment will fluctuate so that an investor's shares, when sold or redeemed, may be worth more or less than their original cost. Returns less than one year are not annualized. For the most recent month-end performance, please call (855) 561-5728. You cannot invest directly in an index. Shares are bought and sold at market price (closing price), not net asset value (NAV), and are individually redeemed from the Fund. Market performance is determined using the Primary Exchange official closing price. Brokerage commissions will reduce returns.
In short, while major market averages dominate headlines, out of favor and forgotten stocks like cannabis we believe can offer investors opportunities for those willing to play the long game.
Investors should consider the investment objectives, risk, charges, and expenses carefully before investing. For a prospectus or summary prospectus with this and other information about the WEED please call 1-855-561-5728 or visit the website http://www.roundhillinvestments.com/etf/weed Read the prospectus and summary prospectus carefully before investing. Investing involves risk. Principal loss is possible.
The statements and forecasts above are subject to significant business, economic, and competitive uncertainties. Accordingly, there can be no assurance that such statements, estimates and projections will be realized, and no representations are made as to the accuracy or completeness of such statements and forecasts. Such statements and forecasts are not indicative of future investment performance. ETF characteristics and allocations are subject to change at any time.
Investing involves risk, including possible loss of principal.
Because the Fund is “non-diversified,” it may invest a greater percentage of its assets in the securities of a single issuer or a lesser number of issuers than if it was a diversified fund. As a result, the Fund may be more exposed to the risks associated with and developments affecting an individual issuer or a lesser number of issuers than a fund that invests more widely. This may increase the Fund’s volatility and cause the performance of a relatively small number of issuers to have a greater impact on the Fund’s performance.
Companies involved in the cannabis industry face intense competition, may have limited access to the services of banks, may have substantial burdens on company resources due to litigation, complaints or enforcement actions, and are heavily dependent on receiving necessary permits and authorizations to engage in medical cannabis research or to otherwise cultivate, possess or distribute cannabis. Since the cultivation, possession, and distribution of cannabis can be illegal under United States federal law under certain circumstances, federally regulated banking institutions may be unwilling to make financial services available to growers and sellers of cannabis.
Cannabis-related companies are subject to various laws and regulations that may differ at the state/local and federal level. Laws and regulations related to the possession, use (medical or recreational), sale, transport and cultivation of marijuana vary throughout the world, and the Fund will only invest in non-U.S. Cannabis Companies if such companies are operating legally in the relevant jurisdiction. These laws and regulations may (i) significantly affect a cannabis-related company’s ability to secure financing, (ii) impact the market for marijuana industry sales and services, and (iii) set limitations on marijuana use, production, transportation, and storage.
In addition, cannabis-related companies are subject to the risks associated with the greater agricultural industry, including changes to or trends that affect commodity prices, labor costs, weather conditions, and laws and regulations related to environmental protection, health and safety. Cannabis-related companies may also be subject to risks associated with the biotechnology and pharmaceutical industries. These risks include increased government regulation, the use and enforcement of intellectual property rights and patents, technological change and obsolescence, product liability lawsuits, and the risk that research and development may not necessarily lead to commercially successful products.
As an ETF, the fund may trade at a premium or discount to NAV. Shares of any ETF are bought and sold at market price (not NAV) and are not individually redeemed from the Fund. Due to the costs of buying or selling Shares, including brokerage commissions imposed by brokers and bid/ask spreads, frequent trading of Shares may significantly reduce investment results and an investment in Shares may not be advisable for investors who anticipate regularly making small investments.
The Fund is a recently organized investment company with no operating history. Please see the prospectus for details of these and other risks.
Fund is distributed by Foreside Fund Services, LLC.
Foreside Fund Services and Roundhill Investments are unaffiliated companies.
