In the last year, cannabis ETFs Purpose and Horizons have returned 157.42% and 136.36% respectively, which is significantly higher than big funds like the ARK Innovation ETF, according to Morningstar.
Mark Noble, Horizons’ executive VP of ETF Strategy, said Canadian LPs in the fund are trading at 14.3 times sales, compared to US MSOs, which are at 6.3 times sales.
“This valuation difference is staggering, given the top 10 MSOs are expected to generate more than $10 billion in revenue in 2021 versus $4 billion in revenue for the top 10 LPs,” he told Morningstar.
Leaning on US legalization
Analysts agree that the most potential lies in the US, where federal legalization could come in the near future.
“Not only is the possibility of federal legislation from Congress and the U.S. Senate on the table for 2021, but it would appear a lot of the upside potential of this is heavily priced in, particularly on the Canadian LP side,” Noble said.
Plenty of risk remains
Legalization isn’t guaranteed, nor is Canadian LP success if it happens, says Noble. And it’s hard to ignore the illicit market, said Morningstar analyst Kristoffer Inton.
“Years of government efforts have done little to stem illegal cannabis,” he said, “but a change to the ease of accessing black market supply could have a significant impact on the pricing power and thus the profitability of legal cannabis companies.”