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When Volatility Means Opportunity Given the cannabis stock boom in 2018 followed by a bust in 2019, the volatility in this industry is not likely to go away anytime soon. These price fluctuations are being fueled by investors’ polarized views on the future of the industry. However, based on the large cannabis retail volumes observed in the cash and options markets, there appears to be a consensus on the abundance of trading opportunities available, and a pressing need for innovative investment solutions for participating in the industry. Let’s look at what are likely to be the main volatility drivers in this industry, and how investors can position themselves to take advantage of them. Cannabis Legalization and Regulations The legal cannabis market in the U.S. is expected to reach $29.7 billion in 2025. 1 Legislation and, more specifically, the lack of federal legislation in the U.S., are likely to remain the most important drivers of volatility in the industry. At this time, 33 states have legalized the medical use of cannabis, and 11 of them have also legalized recreational use. Illinois, which just rang in the New Year with its first legal recreational cannabis sales, is the most recent state to make the jump. As we approach the 2020 U.S. presidential elections, another 6 states are rumoured to be actively pursuing legalization of recreational use through marijuana-specific initiatives or amendments on their ballots. Since two-thirds of Americans are considered to be in favour of recreational cannabis use, 2 a green wave could potentially surge post-election. Cannabis Derivatives Market Projected legal cannabis sales are relying heavily on marijuana-derived products—more specifically edibles, vapes, and cannabis-infused beverages—to meet analysts’ optimistic forecasts. Brand-name partnership opportunities with food and beverage companies are expected to be significant needle movers. However, the volatility swings also indicate the current level of uncertainty around the industry’s ability to strengthen its supply chain. The limited number of retail stores, higher-than-expected retail prices, and the unavailability of legal cannabis-derived products have, until recently, been shaking investors’ confidence as they wonder whether the industry can get past these growing pains. Incremental and Continuously Changing As in any growing industry, mergers and acquisitions are bound to reshape the landscape. Canada has already seen substantial consolidation in the cannabis sector over the last few years, and as smaller companies strive to survive and bigger players seek ways to expand their footprint, investors can expect more strategic alliances. Canada alone has 271 licensed producers holding one or more licenses (cultivation, processing, medical sales, research or analytical testing) 3 and over 60 publicly listed companies, all competing for space in an increasingly crowded market. Whether investors feel cautious, optimistic or skeptical about these projections, they should be seeking the optimal way to participate in the industry. Concerning individual cannabis companies and, more specifically, the largest constituents of the S&P/MX International Cannabis Index (MCAN), the average annualized 30-day volatility for 2019 ranged from 38% to 84%, while the volatility of the index itself over the same period was at the bottom of that range, at 39.10%. COMPANY Symbol Exchange Average Annualized 30-Day Volatility for 2019 Canopy Growth Corp WEED TSX 61.78 GW Pharmaceuticals GWPH NASDAQ 46.83 Cronos Group Inc CRON TSX 66.73 Aphria Inc APHA TSX 84.22 Arena Pharmaceuticals Inc. ARNA NASDAQ 38.43 Given that MCAN is more stable than its constituents, investors interested in reducing their risk exposure could move away from investing in individual stocks and invest instead in the broad-based index using the S&P/MX International Cannabis Index Futures (SMJ). This is less capital intensive, from a margin and transaction cost perspective, than using other cannabis-related investment products such as individual stocks or exchange-traded funds, or even options, which require paying a premium upfront. Conversely, bearish views on the cannabis industry can be implemented more efficiently using futures because the underlying securities are typically difficult to borrow. 1. https://newfrontierdata.com/marijuana-insights/u-s-legal-cannabis-market-growth/ 2. https://www.pewresearch.org/fact-tank/2019/11/14/americans-support-marijuana-legalization/ 3. https://licensedproducerscanada.ca/listings?search_keywords=&search_region=0 Welcome to the Future SMJ: an Innovative Way to Invest in the Cannabis Market For more information: T +1 514 871-7880 [email protected] m-x.ca/smj This document is provided to you for information purposes only. The information provided in this document, including financial and economic data, quotes and any analysis or interpretation thereof, is provided solely for information purposes and shall not be construed in any jurisdiction as providing any advice or recommendation with respect to the purchase or sale of any derivative instrument, underlying security or any other financial instrument or as providing legal, accounting, tax, financial or investment advice. Bourse de Montréal Inc. recommends that you consult your own advisors in accordance with your needs before making decision to take into account your particular investment objectives, financial situation and individual needs. Although care has been taken in the preparation of this document, Bourse de Montréal Inc. and/or its affiliates do not guarantee the accuracy or completeness of the information contained in this document and reserve the right to amend or review, at any time and without prior notice, the content of this document. Neither Bourse de Montréal Inc. nor any of its affiliates, directors, officers, employees or agents shall be liable for any damages, losses or costs incurred as a result of any errors or omissions in this document or of the use of or reliance upon any information appearing in this document. The S&P/MX International Cannabis Index (the “Index”) is a product of S&P Dow Jones Indices LLC (“SPDJI”) and Bourse de Montreal Inc. (“MX”). Standard & Poor’s ® and S&P ® are registered trademarks of Standard & Poor’s Financial Services LLC (“S&P”); Dow Jones ® is a registered trademark of Dow Jones Trademark Holdings LLC (“Dow Jones”); and MX ® is a registered trademark of Bourse de Montreal Inc., used under license. SPDJI, Dow Jones, S&P and TSX do not sponsor, endorse, sell or promote any products based on the Index and none of SPDJI, Dow Jones, S&P, MX and affiliates of MX make any representation regarding the advisability of investing in such product(s) nor do they have any liability for any errors, omissions or interruptions of the Index or any data related thereto. Printed in Canada © February 2020, Bourse de Montréal Inc. All rights reserved.
