Merrill Lynch initiates coverage on the cannabis sector

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April 23, 2019 1:29pm NYSE:MJ

From J. Phillip:

Merrill Lynch Initiates marijuana sector coverage, Expects Further M&A

Since the 2018 legalization of cannabis in Canada, the market seems to have no limits to its expansion. In particular, Mordor Intelligence data shows that the marijuana market was worth $7.7 billion in 2016 but the valuation is astronomic since the turn of 2019. The data anticipates a 37% CAGR such that the valuation of the market by 2023 will hit $65 billion.

Mergers could go international

There is a lot of activity in the sector concerning mergers and acquisitions which another report by Merrill Lynch anticipates to spill to the international scene. In particular, an analyst from the bank noted that further expansion of the industry is contingent on key factors which include the possibility of cannabis oversupply in Canada b 2021. The second key factor is the legalization of cannabis in the US on a federal level.

“There are over 50 publicly traded Canadian cannabis licensed producers, far too many for a cannabis market the size of Canada’s, in our view,” according to the report.

To be sure, any of the two factors will have a tremendous effect on the price of the substance going forward. Notably, if the market reaches 2021 without a major policy shift in the US, oversupply in Canada will sink cannabis prices. However, a US federal legalization will expand the market and with it, more space for expansion of the industry.

US legalization of cannabis still farfetched

Unfortunately, the prospect of US legalization is growing dimmer with significant challenges popping up against the California pot market. For starters, California was the first state to allow controlled trade in cannabis in 2016. However, the Proposition 64 which resulted from the controlled legalization allowed businesses to sell cannabis in select cities.

Therefore, when the California Bureau of Cannabis Control said early this year that businesses could deliver marijuana to any location, cities that restrict the trade went to court. The 24 cities want the courts to stop the businesses from delivering cannabis in their jurisdiction and that indicates certain rigidity in marijuana policy which could further delay federal recognition of the industry.

The ETFMG Alternative Harvest ETF (MJ) was trading at $34.90 per share on Tuesday afternoon, down $0.01 (-0.03%). Year-to-date, MJ has gained 7.30%, versus a 10.15% rise in the benchmark S&P 500 index during the same period.

MJ currently has an ETF Daily News SMART Grade of C (Neutral), and is ranked #59 of 75 ETFs in the Global Equities ETFs category.

This article is brought to you courtesy of Marijuana Stocks.

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