Are Marijuana Stocks & ETFs Coronavirus-Proof?

Coronavirus crisis has dealt a blow to the broader investing world, pushing Wall Street into a bear market territory. But one zone that performed worse even during the rosier times, seems to be bouncing back in this difficult phase. That area is marijuana.

It’s been a volatile journey for marijuana stocks in the past year. Earnings weakness, regulatory issues, “longer-than-anticipated product rollouts and overly enthusiastic forward estimates” hit the space hard.

Pure-play marijuana fund ETFMG Alternative Harvest ETF (CSE:MJ) has plunged 67.3% in the past year, shed 29.3% this year so far and declined 19.4% in the past month. However, the fund gained 9.4% on Mar 26. What made this surge possible?

Rationale Behind the Recent Rally

Regulatory backdrop holds the wild card for the industry’s well-being.Most Democrats have recommended marijuana legalization in their campaign. However, Republicans are yet to give a green signal. Donald Trump has not given any clue about his preference on the legalization of marijuana but senior Republican leaders are not quite supportive of marijuana legalization What's Ahead for Marijuana ETFs After a Dismal Show in 2019? ).

Analysts are now of the view that the United States may now be forced to give a nod to the recreational marijuana selling to cover up some of the massive economic damages caused by the coronavirus pandemic. DataTrek Research’s Jessica Rabe writes in a note, “there’s a simple and effective solution for states and cities to help cover their huge budget shortfalls after the COVID-19 pandemic subsides: legalize recreational sales of marijuana,” as quoted on yahoo finance.

Sales have also been strong for marijuana amid the latest virus outbreak. “Between the time period of March 16 and March 22, key US markets, including California, Colorado, Oregon and Alaska experienced a 50 percent rise in sales of recreational cannabis, and a 41 percent rise in medical cannabis sales from the same period last year”, What Do Canopy Earnings Say About Cannabis ETFs? ).

Any Wall of Worry?

Per a CNBC article, “one of the big concerns is whether cannabis businesses that have to close and send employees home will have to continue paying them under a new federal law, the Families First Coronavirus Response Act. The businesses may not qualify for federal aid in return since marijuana remains federally illegal.” So, even if sales are soaring now, the bottom line may be stressful for these companies.

Stocks and ETFs in Focus

Canopy Growth (NYSE:CGC) (up 8.4% on Mar 26) has a Zacks Rank #2 (Buy) and it came from a favorable Zacks industry (top 20%). Tilray Inc. (NASDAQ:TLRY) (up 56.8%) belongs to a favorable Zacks industry (top 18%) though it has a Zacks Rank #4 (Sell). Aphria Inc. (NYSE:APH) A) (up 13.3%) has a Zacks Rank of 3 and hails from a favorable Zacks industry (top 20%).

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Given the ongoing scenario, investors can keep close tabs on marijuana ETFs like AdvisorShares Pure Cannabis ETF THCX (up 11.1% on Mar 26) and Global X Cannabis ETF (BO:POTX) (up 11.8%).

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Written By: Zacks Investment Research