cannabis resized M

Can the cannabis industry turn growth into profits?

Thought Starters 5 minutes to read
Saxo Be Invested

Saxo Group

Summary:  Find out more about the current state of the marijuana industry, the trading opportunities it presents and how you can gain exposure to it with Saxo.


High growth sparks opportunities
The cannabis industry offers great growth opportunities over the next five years – but they come with great risk. 

The industry is bleeding on free cash flow generation, elevating the risks of refinancing its growth and operations. Recreational use is expected to become the main growth driver, but that comes with additional regulatory risks as cannabis was initially earmarked for medical use. The industry has also struggled in 2019 as market fundamentals have weakened, causing stocks to decline and bringing the possibility of bankruptcies sharply into view.

The key focus in 2020 will be whether the industry can show a path towards profitable growth.

All smoke and no fire?
As of January 2020, the publicly listed Cannabis industry, measured by the S&P/MX International Cannabis Index, had a combined market value $27.6bn, with the five largest companies being Canopy Growth, GW Pharmaceuticals, Cronos Group, Arena Pharmaceuticals and Aurora Cannabis. The index comprises 22 companies with a combined revenue in the last 12 months of $2.5bn – although this is largely concentrated among a few companies. 

The industry’s biggest issue is the lack of profitability amid the high growth – the index’s 12 month free cash flow shows a combined loss of $3.2bn. Consensus is expecting goodwill impairments to accelerate in Q4 as past acquisition values no longer add up with the weak market fundamentals seen in Canada during the second half. Some companies have goodwill-to-assets ratios of more than 50%, and a few more stand at around 20%, making the industry vulnerable from a balance-sheet perspective.

Cannabis stocks
Bankruptcy concerns over some companies combined with large negative free cash flow means that the industry has a large, recurring refinancing issue. With the industry’s shares down 55% since September 2018, financing from traditional banks is drying up, which will leave shareholders to carry the burden of increasing the equity finance. The stock slide since also highlights the high-risk nature of the industry despite its fast growing revenues.
Return cannabis index

Recreational use to fan the flames
The cannabis industry’s historical growth rate has been high and this is expected to continue in 2020. Canada’s legal cannabis market is set to increase by 50% to around $1.7bn*, driven by more retail stores carrying marijuana products, including edibles, beverages and vaping devices. The biggest growth driver in the coming years is likely to be recreational use rather than medical use, but this will have to battle against the increased risk of consumer regulation.

Still, here at Saxo we expect growth rates to remain high for the years to come based on the projections from Bloomberg Intelligence and restructurings to accelerate the weeding out of weak companies in the industry. There will be more pain before the industry consolidates into bigger players with operational moats that can improve operating margins. Regulation has so far been a friend for the industry but over the years this could change as recreational marijuana use increases. Our view on the industry is that it will be volatile for years.

* According to Kenneth Shea, senior analyst (Food & Beverage) for Bloomberg Intelligence

Growth rolled up in volatility and risk
Since the cannabis index’s launch in September 2018 it has had annualised volatility of 45.6%, which is three times that of the S&P 500 at 15.1%. The correlation to the S&P 500 is only 0.11, showing that the industry is not driven by general macro factors but many idiosyncratic risk factors. It also highlights the appeal of Saxo’s new cannabis index futures, as the S&P 500 or any other equity index would be an inadequate hedging instrument.

Volatility Cannabis Index

The idiosyncratic risk factors facing the cannabis industry include the high debt levels of some companies and new regulations arising from an increase in recreational use. Also, goodwill impairment and very high equity valuations cause sharp declines in share prices during earnings releases, which helps to explain the high levels of volatility that make long-term investing difficult.

Trade Cannabis volatility with Saxo
To complement Saxo´s existing cannabis-related product offering, we recently launched S&P/MX International Cannabis Index Futures (SMJ). This means you can now get exposure to the major global cannabis index with a multiplier of 50. Not only will this enable you to hedge against potential losses and enhance your risk management, but more importantly it will also provide you with an efficient way to short the entire industry.

Ticket-Cannabis-Index-resized
Source: Saxo Bank
You can trade a range of other cannabis-related instruments with Saxo, including equities, equity options, ETFs and single stock CFDs. By trading the latter, you´re able to go long or short, enabling you to capitalise on an individual cannabis stock’s volatility regardless of market conditions. And because you trade CFDs on leverage, your upside-potential is significantly increased – although the potential for loss is also greater. 

For reference, GW Pharmaceuticals (GWPH:xnas) makes up 13% of the total S&P/MX International Cannabis Index market cap, and you can trade it as a CFD via SaxoTraderGO with an initial margin rate of 20%.

Trading in financial instruments carries various risks. This also applies to futures and CFDs, where the total loss you may incur may exceed  the initial amount invested.
Ticket-Pharmaceuticals-resized
Get exposure to the cannabis industry
Open an account with Saxo to capitalise on trading opportunities in the high-growth marijuana industry.

Quarterly Outlook

01 /

  • Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Quarterly Outlook

    Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Althea Spinozzi

    Head of Fixed Income Strategy

  • Equity Outlook: Will lower rates lift all boats in equities?

    Quarterly Outlook

    Equity Outlook: Will lower rates lift all boats in equities?

    Peter Garnry

    Chief Investment Strategist

    After a period of historically high equity index concentration driven by the 'Magnificent Seven' sto...
  • FX Outlook: USD in limbo amid political and policy jitters

    Quarterly Outlook

    FX Outlook: USD in limbo amid political and policy jitters

    Charu Chanana

    Chief Investment Strategist

    As we enter the final quarter of 2024, currency markets are set for heightened turbulence due to US ...
  • Macro Outlook: The US rate cut cycle has begun

    Quarterly Outlook

    Macro Outlook: The US rate cut cycle has begun

    Peter Garnry

    Chief Investment Strategist

    The Fed started the US rate cut cycle in Q3 and in this macro outlook we will explore how the rate c...
  • Commodity Outlook: Gold and silver continue to shine bright

    Quarterly Outlook

    Commodity Outlook: Gold and silver continue to shine bright

    Ole Hansen

    Head of Commodity Strategy

  • FX: Risk-on currencies to surge against havens

    Quarterly Outlook

    FX: Risk-on currencies to surge against havens

    Charu Chanana

    Chief Investment Strategist

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperfo...
  • Equities: Are we blowing bubbles again

    Quarterly Outlook

    Equities: Are we blowing bubbles again

    Peter Garnry

    Chief Investment Strategist

    Explore key trends and opportunities in European equities and electrification theme as market dynami...
  • Macro: Sandcastle economics

    Quarterly Outlook

    Macro: Sandcastle economics

    Peter Garnry

    Chief Investment Strategist

    Explore the "two-lane economy," European equities, energy commodities, and the impact of US fiscal p...
  • Bonds: What to do until inflation stabilises

    Quarterly Outlook

    Bonds: What to do until inflation stabilises

    Althea Spinozzi

    Head of Fixed Income Strategy

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain ...
  • Commodities: Energy and grains in focus as metals pause

    Quarterly Outlook

    Commodities: Energy and grains in focus as metals pause

    Ole Hansen

    Head of Commodity Strategy

    Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities i...

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
Full disclaimer (https://www.home.saxo/legal/disclaimer/saxo-disclaimer)

Saxo Bank A/S (Headquarters)
Philip Heymans Alle 15
2900
Hellerup
Denmark

Contact Saxo

Select region

International
International

Trade responsibly
All trading carries risk. Read more. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more

This website can be accessed worldwide however the information on the website is related to Saxo Bank A/S and is not specific to any entity of Saxo Bank Group. All clients will directly engage with Saxo Bank A/S and all client agreements will be entered into with Saxo Bank A/S and thus governed by Danish Law.

Apple and the Apple logo are trademarks of Apple Inc, registered in the US and other countries and regions. App Store is a service mark of Apple Inc. Google Play and the Google Play logo are trademarks of Google LLC.