US cannabis trading volume levels after first-quarter spike

by | Sep 8, 2021 | Comp Table & Market Commentary, Data & Analysis, In the News, Macro

Average daily trading volumes for U.S. cannabis operators appear to be bottoming out at about $80 million per day, a level not seen since October 2020. Trading volumes have declined 75% since peaking in February.

Despite the drop, the volume remains nearly triple the levels seen for the third quarter of 2019 through the third of quarter 2020 and averaged $36 million per day. The increased value is justified by growth in market capitalization.

Average daily trading volumes of U.S. cannabis stocks experienced a dramatic rise between October 2020 and February 2021 on legislative optimism and the meme-ification of cannabis stocks, peaking at an average of about $300 million per day.

The chart above shows the 30-day average daily trading volume of U.S. cannabis stocks (including both OTC and Canadian tickers) in blue on the left axis and a market cap-weighted price index in green of the U.S. operators pegging Jan. 1, 2019, at 100 on the right axis.

Optimism on legislative progress after the “Blue Wave” drove volumes to about $100 million per day, on average, in the fourth quarter of 2020, with much of November and December bouncing between $100 million and $200 million per day.

Volume skyrocketed to $400 million on Jan. 6 after the Democrats’ wins in Georgia’s runoff election and Curaleaf Holdings’ $250 million equity offering.

Volume spiked to an all-time high of $652 million on Feb. 10, when Tilray and Sundial Growers’ volumes spiked above mega-caps such as Amazon, Apple and Facebook on meme trends on Reddit and Twitter. Valuations peaked at 8X 2021 sales and 27X 2021 EBITDA in February.

Trading volumes then consistently declined until June, reaching the current level of about $80 million.

Reports of compliance departments forcing sales at institutional investment firms, as well as institutions refusing to custody U.S. cannabis stocks, have driven declines.

Stocks also started a new 17% decline after the release of the Cannabis Administration and Opportunity Act and comments by Sen. Cory Booker, a New Jersey Democrat, favoring comprehensive federal reform over incremental measures such as the SAFE Banking Act.

Bottoming or another drop coming?

Trading volumes for U.S. operators appear to have stabilized since mid-June at about $80 million per day.

Of course, there are more public companies now, so a return to the $36 million per day seen in 2019-20 seems unlikely absent further stock price declines.

As past MJResearchCo analysis has shown, the OTC and Canadian Securities Exchange have much lower trading volume than the Toronto Stock Exchange or the Nasdaq, where cannabis stocks trade 1% and 2.5%-5% of their market capitalization per day, respectively.

With about $40 billion in total market cap for U.S. publicly traded cannabis operators, that implies about $400 million-$2 billion in average daily trading volume if those companies uplisted to those exchanges and institutional investors could return.

This could begin before federal legislation.

It seems compliance departments are re-reviewing cannabis ownership among their clients, with wealth management firm Merrill Lynch loosening regulations on client ownership of cannabis investments.

MJResearchCo expects Merrill Lynch’s peers to follow as demand from their end customers increases.

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This article on inflation by MJResearchCo was first emailed to MJBizDaily’s MJBizFinance newsletter subscribers on  September 8, 2021 and published here. You can sign up for their newsletter here to be emailed articles contributed by MJResearchCo and other financial contributors.