In the investment world, there is always a sector tipped as the next big thing. As regulations relax around the world, one sector stands out: cannabis.
In the UK, there are only two companies so far have a nod to publicly trade — MGC Pharmaceuticals, which was admitted to listing on 9 February 2021, and Spinnaker Opportunities (renamed Kanabo), which was admitted to listing on 16 February 2021.
While MGC and Kanobo’s shares both briefly spiked as much as 60% when they made their debut, the pair have fallen slightly since. MGC opened at 3.8p per share, and sat at 3p as at 17 May. Kanobo, meanwhile, has dropped from a starting valuation of 31p to 19.6p.
This may not be enough to put off the next round of entrants, however. Earlier this month, Financial News revealed that the FCA had received at least seven more queries about potential listings from cannabis-related businesses since medicinal applications were legalised in 2018.
Medicinal cannabis company Althea has been listed on the Australian Stock Exchange for nearly three years. It now claims to have accumulated a 32% market share in the burgeoning UK market.
“I’m not ruling anything out,” says chief executive Joshua Fegan, when asked whether he would contemplate an initial public offering over in the UK as well.
The same week Financial News spoke to Fegan, the firm had announced a UK expansion plan, which included the CEO re-locating from Australia to make the UK its new headquarters.
Despite teething problems, Fegan said that UK investors could benefit from both a value and a growth stock perspective in the cannabis market.
For value investors, if they saw a medicinal cannabis stock as a potential pharmaceutical stalwart of the future should the drug’s use become mainstream, that could suggest the company is trading at a discount, while from a growth point of view, there are only a few thousand users of Althea’s services in the UK, compared to the 15,000 that had already accumulated in the much smaller Australian market by May 2018.
“But patience is a virtue,” Fegan says. “There are good stocks like ours that are undervalued compared to their peers, but the growth opportunity hasn’t even begun yet.”
He notes that investors could already have accessed cannabis stocks from anywhere in the world as part of globally diversified portfolios offered online, regardless of any changes to the UK’s regulatory regime — the FCA clarified that medicinal cannabis listing applications could be accepted in an announcement in September.
Investors also have to be wary that a lot of companies in the sector remain at an early stage of their growth cycle, and hence could expose them to additional volatility and risk.
“You could have lots of money in the bank and be a lame duck,” Fegan notes. “You could have the best facilities money can buy yet you’re never going to sell anything.”
“The dilemma here is there’s a lot of demand for cannabis stocks, particularly medical ones, but not a lot of supply. What you are seeing is a lot of people without years of infrastructure coming out of the ground, some very green shoots.”
Investment consultant Graham Bentley notes that there will be interesting debates at play around whether fund managers think it appropriate to include marijuana-linked shares in their environmental, social and governance portfolios as interest in responsible investing continues to increase.
“Is it okay to invest in cannabis companies? Yes, if it’s legal,” Bentley says. “But one of the issues that might come up, depending on one’s cultural heritage is whether you think investing in cannabis-related stocks is ethical, whether it passes an ESG test.”
“The sub plot, and the more controversial one, is companies setting themselves up with the expectation that social use of cannabis will be legal on a widespread basis.”
Bentley said that cannabis-related investments could well attract the attention of the kind of retail investors that have driven meme stock frenzies over the likes of GameStop in recent months.
“What drives markets is narratives, not facts and figures. People have an emotional attraction to the story. If you get enough of them it becomes self-fulfilling. I would not be surprised if cannabis listings were created in the same way.”
That’s not to say that investors couldn’t stumble across a major success story though; Bentley notes that if the market develops more, established drug makers may wish to enter the fray, opening the door to lucrative buyouts for smaller producers.
But Shore Financial Planning investment director Ben Yearsley says that those looking for an easy way to make money in cannabis stocks are “probably high on their own supply”.
“I’m still sceptical as it’s so fashionable, and I try and avoid fashion when investing,” he says. “I think the sector needs a few years to mature and settle down before it becomes a sensible investment area.”
A briefing paper compiled by the Investment Association in November notes that while interpretations over whether cannabis investments would breach the Proceeds of Crime Act – a piece of legislation ensuring that criminal funds do not enter the mainstream financial system – remain ambiguous, investment firms will be exposed to “risk and uncertainty”.
The paper cites analysis from Grand View Research that the global legal marijuana market is growing rapidly and expected to reach $73.6bn by 2027.
It notes that UK listed companies like Imperial Brands are starting to take stakes in cannabis companies. Since September 2019, Imperial has had a large holding in Auxly Cannabis Group, while being a UK registered, FTSE 100 company.
To contact the author of this story with feedback or news, email Justin Cash