Profit from the long-term potential in cannabis

Nawan Butt, portfolio manager of the Medical Cannabis and Wellness UCITS ETF, picks some of his favourite cannabis stocks.

As the global economy wrestles with the fallout from Covid-19, investors desperate for good news should consider the secular growth story of cannabis. Over the past few years stock prices in the sector have been volatile, not least because the attitude of regulators was hard to gauge. But now, with medical cannabis deemed an essential service in at least 21 US states, the support from the authorities has become clear. Policymakers’ support should limit the scope for share-price falls and bolster the investment case for pot stocks and exchange-traded funds (ETFs).

Try a dab of CBD

Using marijuana for medicinal purposes doesn’t only involve smoking it. Cannabidiol (CBD) is a non-intoxicating oil derived from cannabis and hemp and is considered helpful for conditions ranging from anxiety to acne. This brings us to Abacus Health Products. Abacus holds a unique position in the complex regulatory structure of US CBD legalisation: it boasts the only CBD topical products in the US market that have been approved by the federal Food and Drug Administration (FDA).

Recently, the biggest hemp and CBD company in the US, Charlotte’s Web (TSX: CWEB) agreed to acquire Abacus. Charlotte’s Web has the most recognised brand in the US for CBD, with an emphasis on its effectiveness against childhood epilepsy. The combined company will account for 35% of the CBD market, selling its products in 15,000 locations and online.

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Tetra Bio-Pharma (CVE: TBP) focuses on cannabinoid-derived treatments to help address chronic pain and eye problems, two of the largest market segments in medical cannabis. Its premier drug (CAUMZ) targets pain caused by advanced and incurable cancer and is in the process of gaining FDA approval; it has been accepted into the “Fast Track” programme. This designation expedites the review process and gives patients rapid access to new drugs.

Tetra is also developing botanical drugs for conditions currently ineffectively serviced by opioids and steroids. With the success of CAUMZ, Tetra Bio-Pharma will be able to reduce the stigma of cannabis-based medicine.

Growth in the cannabis greenhouse

The medical cannabis and CBD wellness boom in the US has had a positive effect across the supply chain. GrowGeneration (Nasdaq: GRWG) allows cannabis groups to build and maintain regulated cultivation sites throughout the US.

It is a hydroponic equipment supplier with 27 garden centres across ten American states. Hydroponics has been a flourishing sub-segment of the market pioneered by the likes of Scotts Miracle Grows. GrowGeneration supplies thousands of products, including organic nutrients, soils, advanced lighting technology and state-of-the-art equipment used by commercial and home growers. It also offers greenhouse design and harvesting services for growers at any scale.

In its latest quarter, GrowGeneration managed to produce same-store sales growth of 62% year-on-year, along with positive net income. An industry with this kind of growth trajectory is a highly attractive long-term bet and a key component of our ETF’s portfolio.

Nawan Butt is portfolio manager of the Medical Cannabis and Wellness UCITS ETF