If you knew what you know now in the 1950s, would you have invested in tobacco and cigarette companies? If you said yes, you have a chance to do the same thing today. The cannabis business is one of the fastest-growing in the world, and it does not look like it will stop growing any time soon.
As more and more U.S. states legalize cannabis for both medical and recreational use, the demand for cannabis products is skyrocketing. A report by Brightfield Group says that the legal cannabis market will grow from $10.9 billion in 2018 to $66.3 billion in 2025. The U.S. is in the lead, with about 50 million users and $25 billion in sales expected by 2025.
California has the most people who use cannabis, and by 2025, the state is expected to make over $7 billion from it As the number of people who want to use cannabis grows, so does the number of people who want to invest. This is where marijuana exchange-traded funds (ETFs) come in.
A cannabis ETF is a kind of exchange-traded fund that invests in companies that have something to do with cannabis. This can include growers, processors, brands, retailers, and more. Cannabis ETFs give investors a way to get in on the cannabis industry’s fast growth without having to pick individual stocks. Since the cannabis industry is expected to keep growing at a very fast rate, investing in a cannabis ETF can help your portfolio grow like a weed.
A person am putting money into the AdvisorShares Pure Cannabis ETF (NYSEARCA: YOLO), whose share price has dropped a lot over the past year. But once cannabis use is legalized and companies can get normal access to the financial system, growth will really take off. its stock price will go up. You only live once, so buy this ETF.
The Trough of Disillusionment
The marijuana business has had a rough year. Cannabis stocks have dropped sharply because of too much hype, unrealistic expectations, and a lack of knowledge about the problems the industry faces. This has made many investors angry and even sad about their chances of making money in the sector.
But it is important to keep in mind that every new business has growing pains. As an industry grows, it makes sense that there will be bumps in the road. Even though the past year has been tough, it is important to remember that the cannabis industry still has very bright long-term prospects.
Here, MoneyCrashers puts cannabis on top of Gartner’s “hype cycle.” The share price is in Gartner’s “trough of disillusionment” right now because cannabis use and access to the financial system are taking so long to become legal. Even though we can not know for sure when an investment’s bottom is, the left side of the chart above gives us a hint.
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The volume study on the left side of the above chart shows that YOLO is almost done selling. Below, we can also see that the RSI for the longer time frame of a week is very oversold. Most RSIs are based on short-term trading and use the daily time frame. Rarely does this last for a long time, and when it does, the price usually goes up quickly.
Uncertainty about the stock market as a whole due to the Federal Reserve tightening is a concern. Still, YOLO has already been beaten up and has limited downside, especially over the long term as legal adoption continues and economic normalization happens, which is expected to support growth rates.
What the Market Does not Know About Cannabis Stocks
As with any investment opportunity, what makes it interesting is not what the market knows, but what it does not know or does not care about. In the case of the cannabis industry, investors on the stock market do not realize how quickly the remaining cannabis companies are making money and becoming profitable.
Even more interesting is that the money is coming in even though many states have not yet legalized marijuana, and the federal government has not passed any laws to give cannabis companies full access to the financial system. At the moment, 37 states allow some form of medical marijuana, and 18 states allow full recreational use.
There is a good chance that 3 to 8 more states will follow suit. The House passed a federal marijuana bill on April 1, 2022. This time, it was called the MORE Act, and only three Republicans voted for it. It seems likely that marijuana will be legalized and taxed at some point, but it could take a while.
On the other hand, Congress is likely to vote soon on a manufacturing bill that could protect banks that work with businesses that sell legal marijuana in their states. There seems to be enough support to pass at least some rules that would let businesses that sell marijuana accept payments other than cash (like credit cards) and put all their deposits into the financial system. The best way to get a low price is to invest before you know everything.
How YOLO and the top 12 holdings work
The AdvisorShares Pure Cannabis ETF is a global fund that is similar to the AdvisorShares Pure US Cannabis ETF (MSOS), which only invests in the U.S. and mostly in MSOs or multi-state operators. Both ETFs are actively managed, but the main difference is how the money is split up by country:
Here is a list of what Seeking Alpha says are the top 10 YOLO holdings. You will see that YOLO has a 34% stake in MSOS. AdvisorShares says that they are doing this to make it easier for people to invest in U.S. stocks. They also say that this might change in the future if the law changes.
One of the most important things is that the U.S. fund needs to hold SWAPs instead of stock shares for cannabis companies that do business in more than one state. When something crosses state lines, it is automatically a federal issue. So, until federal laws are passed, the workings of MSOS are expensive and difficult.
In the end, that is a problem that could be fixed by the laws that Congress is working on right now. When the MSOS holdings are broken down, the following are YOLO holdings of 3 percent or more as of April 11, 2022.
When you look at each of these 12 companies from a financial point of view, the REIT company Innovative Industrial is the only one that is very strong. Most of the other things are about average. But keep in mind that this is before the laws and access to money that will come in the future.
Even though operating and net margins are getting better, they are still not where we want them to be. But the gross margins and the fact that almost every company is still doing mergers and acquisitions (M&A) and spending on capital expenditures (CAPEX) show that as these things settle down, the net margin will improve, which will drop more to the bottom line for investors.
There are clear reasons to invest in MSOS, which is focused on the multi-state operators, if you are willing to take on more risk and want to stay in the U.S. If good laws were passed, these stocks could go up. On the other hand, Canadian businesses are looking at more than one country. The world is more diverse.
Putting an End to Investment Ideas
To be clear, there is a risk with cannabis during this time before it is fully legalized. Laws could go against them, but it is much more likely that they will be slowly accepted. It is curious about how much business cannabis seems to be taking away from alcohol and cigarettes. After such a sell-off, It is quite curious about the spot where value hunters and institutions start to buy.
These companies as a whole are worth about what they are worth, and they are undervalued by 30–50% compared to their earnings over the next 3–5 years. Do your own analysis, but do not forget to look ahead. And you should compare yourself to companies that sell alcohol.
From a technical point of view, the selling pressure seems like a lot of work. Look at the left side of the price chart It is to be observed how the demand is weighted by the number of sales. You should buy YOLO right now and buy more of it if it goes down to about $7-8.
Also, if you are selling puts, you can sell puts that are slightly out of the money up to a few months from now and still make enough money. You can find out more about cash-secured put selling in my articles about how to make money in retirement.
Join us as we choose the best Cannabis stocks to add to our YOLO holding as “overweights” for possible gains of several times their value over the next few years.