American Cannabis Stocks Are Rallying on Massive ETF Inflows

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The cannabis sector just put together back-to-back weekly gains after nine consecutive weekly declines. One of the hardest hit parts of the market in 2021 has been the American cannabis companies, which has been evident in the performance of the AdvisorShares Pure US Cannabis ETF (MSOS), but it looks like interest has surged in November. The ETF posted a 52-week low on November 4th at $25.70, leaving it then more than 53% below its all-time closing high on February 10th and down 29.6% year-to-date. In fact, it had declined 4.2% from a year earlier. Just six days later, though, the ETF has soared 24.8%:

MSOS Has Gained 25% in 6 Days

What’s driving the ETF higher is likely the talk of the pending introduction of the States Reform Act by Republican Representative Nancy Mace, a bill that would legalize cannabis federally with less FDA involvement and lower taxes compared to the Democratic legislation, the Cannabis Administration and Opportunity Act. Another factor is that financial reports from some of the leading multi-state operators weren’t as bad as feared.

Perhaps more interesting than the price action in MSOS has been the surge in volume. Last week, 20 million shares traded, or roughly $600 million. In fact, it was not only a record week for the number of shares but also the dollars traded:

Record Number of Dollars Traded in MSOS

The surge in volume has been accompanied by unprecedented inflows into the ETF. This past week, the number of shares increased by 39%. To put the inflow into perspective, the 10.9 million shares issued this past week was almost three times higher than the 3.8 million shares issued in each of the first two weeks of the year.

MSOS Share Count Up 39% in Just 1 Week

The issuance of shares by the ETF infused it with approximately $330 million, $151 million of which remains to be invested potentially and could fuel additional gains in the underlying securities.

We reached out to the manager, but their visibility into the investors is limited. AdvisorShares CEO Noah Hammon suggests that the money has come from “a combination of retail/self directed, some advisors, and then probably hedge funds and family offices.” We struggle to understand how so much money could come in such a short period of time from such a broad array of investors, but we have no way to identify the source of funds. We have previously suggested that the ETF, which trades on the NYSE Arca, enables investors who are limited from investing in OTC or foreign listed securities. We continue to commend AdvisorShares for creating this novel workaround that has left MSOS with $1.24 billion assets under management.

From our vantage, it appears as if a large investor or perhaps a group of large investors is using this ETF to invest in American cannabis companies. The share issuances were spread out throughout the week. Here they are by day so far in November, with the ETF expanding its shares by 41.6%:

Shares Have Expanded by 41.6% in November

If the ETF continues to get inflows, it could help boost prices further, as the manager currently has $151 million in cash (12% of assets) that it will likely invest. As we noted in September, the vast majority of the positions are direct cannabis operators, and there are also a few ancillary companies as well as a CBD company. The ETF has added positions in two new names in the past week, Agrify and urban-gro, and it has added to many but not all of its prior positions thus far. We believe that additional investment into the sector by the fund could benefit even names not held by the ETF as other holders sell stocks in it that are rising and buy other stocks in the sector.

The surge in interest in this ETF earlier in the year followed a massive rally in Q4, when MSOS gained 46.6%, while the renewed interest follows an extended decline that has left the stocks of many of the leading cannabis operators and this ETF still down in 2021. We encourage our readers to pay attention to this new dynamic, as it could have a substantial impact on the performance of the stocks over the balance of the year.

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Alan & Joel

Exclusive article by Alan Brochstein, CFA
Alan Brochstein, CFA
Based in Houston, Alan leverages his experience as founder of online community 420 Investor, the first and still largest due diligence platform focused on the publicly-traded stocks in the cannabis industry. With his extensive network in the cannabis community, Alan continues to find new ways to connect the industry and facilitate its sustainable growth. At New Cannabis Ventures, he is responsible for content development and strategic alliances. Before shifting his focus to the cannabis industry in early 2013, Alan, who began his career on Wall Street in 1986, worked as an independent research analyst following over two decades in research and portfolio management. A prolific writer, with over 650 articles published since 2007 at Seeking Alpha, where he has 70,000 followers, Alan is a frequent speaker at industry conferences and a frequent source to the media, including the NY Times, the Wall Street Journal, Fox Business, and Bloomberg TV. Contact Alan: Twitter | Facebook | LinkedIn | Email

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