EQUITIES COMMENTARY Jun 13, 2024
Matt Chessum
Director securities finance
Cannabis stocks remain a target for short sellers as stockprices continue to reflect the difficulties that the industryfaces.
Marijuana stocks have the potential to be the nextmulti-billion-dollar industry as countries around the world startto decriminalize and legalize the drug for both recreational andmedicinal purposes. Canada legalized the substance in 2018 andseveral US states have since followed suit in the ensuing monthsand years. Despite remaining illegal at a federal level, thesubstance is legal for recreational use in 23 US states and formedical use in 37 US states.
In August 2023, the U.S. Department of Health and Human Servicesrecommended easing restrictions on marijuana. "Pot-stocks" jumpedas a result but following the slower-than-forecast progress inlegalizing the substance, uncertainty continues to hang over thepotential profits that can be generated by the industry.
Canopy Growth Corp (WEED Canadian line and CGC US line) was onceCanada's most valuable marijuana company with a marketcapitalization of $25B at its peak. This has now shrunk to $557M.The company recently announced a follow-on equity offering of$250M, to spend on acquisitions, working capital and generalcorporate purposes. This news sent the company's share price lowerby 7.6%. Short Interest continues to climb in the stock, recentlyreaching its highest level since 2023, as a lack of profits, due tothe high costs associated with the level of regulatory complianceneeded to produce the product, continue to weigh on both thecompany and the broader sector. To the end of May 2024, lenders ofthe stock have received $57M in securities lending fees.
When looking at ETF flow data for some of the largest MarijuanaETFs (by assets under management), a dichotomy can be seen acrossthe investment flows. Those ETFs focusing on the US market appearto be experiencing sustained positive quarterly inflows whilstthose investing across the global marijuana market appear to beless attractive to investors. Any concentration in US "pot stocks"could offer investors greater potential for growth following therecent easing of restrictions at the state level. Any ETF heavilyweighted towards Canadian cannabis companies is expected to sufferfrom the impact of US federal cannabis laws. This prevents foreigncompanies from entering the US cannabis market whilst retainingtheir listing on a US exchange as long as marijuana is illegal atthe federal level.
Despite the cannabis industry growing and its use becoming moreaccepted, the industry still faces major challenges. Cannabisproducing companies continue to face competition from illegaloperators who do not have the same regulatory costs and do not paytaxes. They also face the on-going challenge of keeping prices lowin a heavily regulated environment to ensure that they remaincompetitive. This creates difficulties in scaling operations andcontrolling costs. Until these trends change significantly, it islikely that cannabis stocks will remain on the radar of shortsellers.
S&P Global provides industry-leading data, software and technology platforms and managed services to tackle some of the most difficult challenges in financial markets. We help our customers better understand complicated markets, reduce risk, operate more efficiently and comply with financial regulation.
This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.
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