Green Thumb’s 21.41% YTD Drop Weighs on AdvisorShares Pure US Cannabis ETF

The AdvisorShares Pure US Cannabis ETF traded at all-time lows in August, with the industry struggling to grow against a backdrop of regulatory ambiguity. However, some of its constituents, such as TerrAscend, are managing to flourish despite the adverse conditions.

• Mastercard calls for stores to block cannabis debit card transactions.
• TerrAscend stock gains 53.1% year to date.
• Cannabis market research firm BDSA believes the US cannabis beverage market could grow to $381m by 2027.

The AdvisorShares Pure US Cannabis ETF [MSOS] fell 5.86% in the month to 28 August. A five-day rally to 22 August was undone, with losses over the following two sessions wiping out these gains, to leave the fund at an all-time low, down 31.04% year to date.

Underwhelming earnings from the fund’s top holdings have weighed heavily on its performance, as an industry that had once braced for an explosion driven by US federal legalisation finds itself floundering instead. Mastercard [MA] underscored the issue in late July when it issued a statement urging stores selling marijuana, even in jurisdictions where its use is legalised, not to accept debit card payments for such products.

“We instructed the financial institutions that offer payment services to cannabis merchants and connect them to Mastercard to terminate the activity,” a Mastercard spokesperson told CNBC. “The federal government considers cannabis sales illegal, so these purchases are not allowed on our systems,” he added.

While cannabis advocates are pushing for changes to a situation that puts even legitimate marijuana markets in limbo, the performance of MSOS’s largest holdings has been mixed.

TerrAscend Hits New Highs

There are some positive signs for the fund. Its largest stock holding as of 28 August, TerrAscend [TSNDF], has had a strong 2023, gaining 53.1% year to date. The company announced record second-quarter (Q2) revenue of $72.1m on 10 August, exceeding the consensus estimate of analysts polled by Refinitiv by 2.1%. 

For the same reason that Mastercard is seeking to prevent its cards being used for cannabis payments, MSOS is unable to hold some US cannabis companies directly. The fund offers exposure to these stocks via total return swap agreements with a broker. Its top four holdings, accounting for a combined 70.6% of the fund as of 24 August, are swap agreements like these.

The largest of these holdings is Green Thumb Industries [GTBIF], which accounts for 25.14% of the fund. Green Thumb epitomises the struggles of the sector and the fund through 2023; the stock is down 21.41% year to date, although it has trended relatively flat over the past month. The stock hit a 52-week low on 11 August, two days after announcing Q2 earnings of $0.05 per share, just in line with the estimate that analysts polled by Refinitiv had expected.

Drinking in the Future

Green Thumb’s underwhelming results compounded a gloomy mood among analysts covering the stock. Stifel Nicolaus had already lowered its price target for the stock to C$22.00 from C$30.00 on 31 July, and on 9 August Alliance Global Partners followed suit by lowering its target from C$21.00 to C$19.00. 

The consensus target for Green Thumb among five analysts polled by Refinitiv is $11.00, which implies 63.20% gains from the 28 August close. The most pessimistic estimate of $10.00 still implies 48.37% upside. 

Looking forward, the beverage market could provide a tailwind for an industry that is otherwise struggling. Brendan Mitchel-Chesebro, Industry Analyst at cannabis market research firm BDSA, said in an interview with The Fly that the US cannabis beverage market “has been trending upward growth for the last three quarters”. BDSA estimates that this market could be worth $381m by 2027.