In only a few short years, cannabis has emerged as one of the next big market disruptors. Today, as billions of dollars pour into the sector, investors in South Africa are keen to take part in the anticipated marijuana boom. But before you add marijuana stocks to your portfolio, consider how the legality issues that surround this product may impact profits.
Cannabis refers to plants Cannabis sativa, Cannabis indica and Cannabis ruderalis. This plant can be processed for a variety of purposes, from topical oils and food products to building materials — but it’s popularly grown and consumed for its psychoactive properties.
Cannabis legalisation is a divisive subject, but the South African government has legalised both recreational and medical marijuana consumption. Under this law, individuals are allowed to use, grow and possess marijuana for personal use. Of course, there are limits to this dagga law. It’s still illegal to smoke cannabis in public spaces and you’re also not allowed to sell your cannabis either.
There are also limits to how much cannabis you’re allowed to possess at any given time, which consists of 1.2 kilograms in a private dwelling where two or more people live together and 600 grams for someone who lives alone. You’re also allowed to give another person 100 grams of dried dagga or 30 seeds at a time, so long as it’s for free.
Cannabis stocks are shares of any company that grows, harvests, sells, manufactures or distributes cannabis, including hemp.
Marijuana vs. hemp
Unlike marijuana, hemp is not a narcotic. While hemp and marijuana both come from the cannabis plant, hemp has a lower component of the psychoactive THC — typically less than 0.3% — which means it has no psychoactive effects.
Typically, hemp is used in food products, building materials and textiles. Marijuana, on the other hand, is primarily used for medicinal and recreational purposes.
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Right now, there is only one company listed on the JSE that has invested in the cannabis industry, Annheuser-Busch InBev (BUD). The company doesn’t directly produce any cannabis products itself but is involved in the industry, for instance through a joint venture with Canadian pharmaceutical and cannabis company Tilray, and thus their stock prices will be influenced by that sector as well.
South African investors who are interested in the marijuana sector can look to BUD as a possible investment option. It is also likely that other cannabis-oriented companies will enter the fray on the JSE within the next couple of years.
If you’re interested in international cannabis stocks, you’ll need a brokerage account that offers access to global or over-the-counter stocks.
Below is a list of companies that have exposure to the marijuana sector and are listed on US stock exchanges. There aren’t many options locally, yet, but that should start to change within the coming years as the South African marijuana market expands.
Note: The above lists may not be fully representative of the American or global marijuana marketplace, and some companies may not directly deal in cannabis but have cannabis exposure.
What ETFs track the cannabis category?
ETFs contain a bundle of stocks, usually hundreds, and these often track an index of stocks. There are a handful of cannabis ETFs listed in the US.
- AdvisorShares Pure Cannabis ETF (YOLO)
- Cambria Cannabis ETF (TOKE)
- ETFMG Alternative Harvest (MJ)
- Horizons Marijuana Life Sciences (OTC:HMLSF or TSX:HMMJ)
- The Cannabis ETF (THCX)
Despite its lack of legality in numerous countries and even some states in the US, cannabis is a popular product. And the world is becoming more open to its use.
As more countries become accepting of medical and recreational marijuana use, the cannabis market grows. And as the cannabis market grows, so do sales, profits and company valuations.
The shift in attitude towards cannabis isn’t limited to the US. In 2018, Canada legalised recreational marijuana use across the country. And other international governments are reassessing their cannabis laws too, potentially paving the way for an explosion of new businesses.
Statista reports that in 2018, the global cannabis sector was worth $13.8 billion. By 2025, it predicts the sector will swell to $43 billion. The cannabis market is one poised for growth — and for investors, growth means profit.
Positive growth projections aside, cannabis may not be a practical addition to your portfolio. And that’s because this sector is riddled with risks — many of which stem from the legality issues that surround the product.
As laws that surround the legalisation of recreational marijuana continue to shift, investors must be wary about how high tax rates could impact the market. Tax rates have the potential to cripple cannabis providers in the US states that allow recreational marijuana because of how high consumers are taxed.
For example, in California consumers are taxed close to 45% for recreational cannabis. With taxes that high, it’s little wonder that Golden State consumers turn to the black market to purchase their product, leaving cannabis providers high and dry.
Financing for cannabis companies is also a concern, as cannabis companies are seen as high-risk merchants in the eyes of many financial institutions. As a result, many of these banks aren’t willing to provide essential banking services and funding must be found elsewhere. One way cannabis companies can raise funds is to issue common stock, but this dilutes the holdings of existing investors.
Overall, the cannabis market seems to be gaining traction. And for investors that can tolerate risk, this is an exciting prospect. But ultimately, the variables that factor into the profitability of this market are constantly in flux — and this sort of instability can lead to price volatility.
The global cannabis market as a whole is expected to grow and it may gain significant traction in the U.S., where its legality remains contended at the federal level. The market value of the cannabis industry in the U.S. is projected to climb to $30 billion anually by 2025, according to New Frontier Data.
More U.S. states have aimed at relaxing laws around its usage. New Jersey, Arizona, Montana and South Dakota in December 2020 approved ballot measures to legalise recreational use of marijuana. However, marijuana stocks fell following this news as federal elections remained in question.
The MORE Act which would decriminalise marijuana at the federal level passed the House in December 2020. But its future is foggy. So it’s important to carefully analyse cannabis stocks if you’re planning to invest in US-based stocks, to find where the potential long-term winners may be.
While smoking weed is perhaps the most well-known use of cannabis, there are many types of businesses that are positioned to benefit from the growing sector. As more cannabis products are given the green light, we’ll see the market continue to expand. The legalisation of many of these products is new and in some cases, still underway:
- Medicinal products. Medicinal cannabis is used for the treatment of cancer pain, epilepsy, palliative care, chemotherapy nausea, neuropathic pain, anorexia and neurological conditions. Cannabidiol, also known as CBD, is a derivative of the marijuana plant that’s become increasingly popular for medical uses in recent years.
- Research. The scientific study of marijuana has accelerated in recent years with the discovery of many other beneficial compounds besides the psychoactive THC.
- Recreational use. Marijuana as a recreational drug is still illegal or restricted in many places. That said, legalisation of both recreational and medical marijuana continues to roll out across the world. The plant is consumed to achieve feelings of relaxation or euphoria, but negative side effects have been reported, including headache, dizziness, nausea, delusions and hallucinations. Long-term use of the substance may cause cannabinoid hyperemesis syndrome (CHS).
- Food products. Hemp is used as an ingredient in a range of products, including cooking oils, snacks, protein powder, cooking flour and more. The sale, possession and manufacture of any medicine or controlled substance (which includes hemp) is controlled by the Medicines Act in South Africa and is regulated by the South African Health Products Regulatory Authority (SAHPRA). The sale of food products made from hemp seeds, hemp seed oil, and cannabis oil is not illegal under the current Foodstuffs Act under SAHPRA regulation.
- Building materials. Hemp is used in insulation and building construction materials under several names, including hempcrete, hemp masonry and hemplime.
- Clothing. Hemp is broadly recognised as one of the most sustainable materials available in the manufacture of clothing.
- Beauty products. Hemp is commonly used in various health and beauty products, such as moisturizers, lip balm, makeup and skin oils.
Disclaimer: The value of any investment can go up or down depending on news, trends and market conditions. We are not investment advisers, so do your own due diligence to understand the risks before you invest.
The legal cannabis sector is positioned to grow in the coming years and there are a number of ways to invest. But keep in mind that past performance is not a guarantee of profit and all investments come with inherent risks.
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