Marijuana: Keep Riding The Wave?

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About: ETFMG Alternative Harvest ETF (MJ), Includes: ACB, ADRS, CGC, CRON, GWPH, HEINY, KO, SMG, STZ, TAP, TLRY
by: William Sabin
Summary

We review several different ways to invest in the marijuana boom - from recreational, medical, and others that stand to gain as the decriminalization and wider acceptance occur.

We follow up on the industry and a relook at the exchange-traded fund, ETFMG Alternative Harvest ETF.

We take a closer look at the marijuana plant components - Cannabidiol and tetrahydrocannabinol.

This article is a follow up to my insanely popular article on this topic about six months ago. I seem to get several emails a week touting the marijuana boom, where to invest, become a millionaire investing in pot companies, etc. It seems like it's where everyone thinks they are going to make the big money.

Almost daily, there are headlines about pot stocks. The stocks have been soaring and collapsing at regular intervals. Many of these stocks only trade in Canada, but there are now also some that trade via American Depository Receipts (ADRs) in the USA. While many of the ADRs are new, the volatility in this market is not.

We review several different ways to invest in the marijuana boom - from recreational, medical, and others that stand to gain as the decriminalization and wider acceptance of the plant and its derivatives become more culturally acceptable and more mainstream in the USA and Canada. Remember, not all of these stocks trade on a US Exchange and can be very volatile.

On a personal note, I'm not a proponent of recreational use marijuana - it's not good for the individual or society. However, I am generally fine, within certain parameters, exploring the medical use of CBD.

THC, telsa, weed, pot, marijuna, Tilray

(Source: Herb)

A Closer Look at Cannabidiol

Cannabidiol (CBD) and tetrahydrocannabinol (THC) - are the two main ingredients in the marijuana plant. Both CBD and THC belong to a unique class of compounds known as cannabinoids. THC gets a smoker high while CBD is used primarily in the medical field. The key differences between CBD and THC are discussed below.

While laws surrounding marijuana and THC are fairly clear (but not consistent), the legal status of CBD is less clear. In the United States, CBD is technically illegal since it is classified as a Schedule I drug under U.S. federal law.

pot, high, legal, ko, tilray, canada, usa, trump

(Source: Zacks)

ETF - MJ (ETFMG Alternative Harvest ETF (MJ))

The only semi-logical play (if there is one) in the space appears to me to spread your risk and allow the professional managers to play in this developing field. Thus, I am considering taking a position in ETFMG Alternative Harvest ETF.

From its fact sheet, MJ is the first pot-focused ETF to trade in the U.S. The fund tracks an index of worldwide stocks that are engaged in the legal cultivation, production, marketing, or distribution of cannabis products for either medical or non-medical purposes. MJ also holds stocks of companies that trade or produce tobacco or tobacco products, or fertilizers, plant foods, pesticides, or growing equipment for cannabis or tobacco. In addition, the fund can hold pharmaceutical companies that produce, market, or distribute drug products that use cannabinoids. It can only hold companies that are engaged in legal activities and possess all necessary permits.

The amount of money pouring into the ETF is astounding. Of course, with all this money coming in, MJ has to invest it somewhere. Thus, the stocks it buys continue to soar.

Of course, the opportunities are big in this market, but so is the volatility as seen in MJ's price below over the last year.

(Source: ETF.com)

Shown below are the top ten countries where MJ is invested in - to no surprise, Canada and the USA are its primary markets. As you will probably start to realize, Canada claims three of four of the largest cannabis companies.

(Source: ETF.com)

Shown below are the key stats on the ETF:

(Source: Bloomberg)

The top 10 holdings of the ETF are all names you are probably familiar with:

(Source: Yahoo)

A Review of some of the key underlying holdings

Canopy Growth Corporation (NYSE:CGC)

Canopy Growth Corporation engages in growing, possession, and sale of medical cannabis in Canada. Its products include dried flowers, oils and concentrates, softgel capsules, and hemps. The company offers its products under the Tweed, Black Label, Spectrum Cannabis, DNA Genetics, Leafs By Snoop, Bedrocan Canada, CraftGrow, and Foria brand names.

(Source: Yahoo)

Cronos Group Inc. (CRON)

Cronos Group Inc. is a principal investment firm. The firm seeks to invest in companies producing medical marijuana under Canada's Marijuana for Medical Purposes Regulations (MMPR). The firm typically invests in companies based in Canada and is based in Toronto, Canada.

Per Marketwatch, Cronos was downgraded to a hold from a buy by GMP Securities noting a 21% downside. The stock has surged ~110% year-to-date on no material news.

(Source: Yahoo)

Tilray, Inc. (TLRY)

As I mentioned in my last marijuana article, TRLY is a difficult stock to invest in for me.

That is when the stock was 150. Remember this stock was close to 300 for a short time. It's too expensive to own outright even at these prices, but the price is closer to fair value. Buying or selling options, including LEAPS, have premiums that are too expensive, large bid/ask spreads, and are thinly traded. For me, I'm comfortable not owning this stock directly at this time.

(Source: Yahoo)

Aurora Cannabis Inc. (NYSE:ACB)

Aurora Cannabis is a Vancouver-based cannabis producer and produces and distributes medical cannabis products. They apparently still are in discussions with Coca-Cola (NYSE:KO) to develop weed-infused beverages - developing drinks infused with CBD, the non-psychoactive ingredient in marijuana that treats pain but doesn't get users high.

Coca-Cola issued this statement:

Along with many others in the beverage industry, we are closely watching the growth of non-psychoactive CBD as an ingredient in functional wellness beverages around the world. The space is evolving quickly. No decisions have been made at this time."

(Source: Yahoo)

GW Pharmaceuticals (GWPH)

In May 2017, I recommended taking a long position in GW Pharmaceuticals and its new and exciting medical breakthrough, Epidiolex. Since that time, the stock is up over 60%. The reason: there were discussions that the U.S. Drug and Enforcement Administration (DEA) has plans to reclassify GWPH's lead cannabinoid pharmaceutical product, Epidiolex.

At that time, I mentioned that it might be worth taking a longer look at investing in the company. Epidiolex is described as "a liquid formulation of pure plant-derived cannabidiol," CBD, which is in development for the treatment of a number of rare childhood-onset epilepsy disorders.

GWPH states that it "developed the world's first prescription medicine derived from the cannabis plant for the treatment of spasticity due to multiple sclerosis, Sativex, now approved in over 29 countries outside of the United States for the treatment of spasticity due to Multiple Sclerosis." It is also mentioned that over 1,500 patients have been exposed to Epidiolex treatment and that 97% of patients who have completed Phase 3 trials have entered long-term extension.

(Source: Google)

I decided to cash out of GWPH in September and am happy I did. My main concerns are the continued losses and lack of cash flow; however, it is not atypical for companies in their research, development, testing, and approval phases to throw off losses.

Beverage-Infused Plays

The latest to join the list of the countries that have legalized recreational marijuana is Canada - the second nation to allow its full legalization effective October 17, 2018. Many beverage producers are gearing up to increase their market share in Canada with the change in pot laws. Cannabis-infused drinks are gaining popularity as consumers look to the medicinal value of marijuana. Many consider smoking as bad for one's health but consider infusing a little pot into their drinks as healthy, making the marijuana market a great fit for beer and soda companies.

Recently, Constellation Brands (STZ) made a $5 billion investment to increase its stake in Canada's biggest list marijuana company, Canopy Growth Corp., from 9% to 38%. As with most stocks, STZ had a difficult 4Q18, down as of late September.

(Source: Yahoo)

Molson Coors (TAP)

Additionally, Molson Coors has a joint venture with Hydropothecary Corp., which will be selling non-alcoholic cannabis-infused drinks in Canada after legalization. In addition, Heineken (OTCQX:HEINY) has a cannabis-infused sparkling water named "Hi-Fi Hops" via a sales unit with Craft brewer Lagunitas.

Image result for Hi-Fi Hops

(Source: Lagunitas website)

(Source: Yahoo)

Other Ways to Participate in the Growth of Marijuana

If owning the pot stocks outright is too much of a gamble and does not fit your risk tolerance and if you don't want to invest in the lackluster drink market, you might consider shares in Scotts Miracle-Gro (SMG).

Scotts Miracle-Gro

Scotts is a leader in the hydroponics industry - hydroponics is a method of growing plants without soil by using mineral nutrient solutions in a water solvent. Growers depend on hydroponics for producing high-quality cannabis.

(Source: Google)

SMG has rocketed 21% in January after the U.S. Farm Bill triggered optimism that demand for the company's marijuana business, Hawthorne, could accelerate. Hawthorne Gardening is Scotts' cannabis subsidiary.

Buyer beware again - I would not buy SMG just for the company's small pot business.

Arguments Against the Drug

For a different perspective on marijuana, mental illness, and violence, this article lays out an argument against the drug. This article walks you through the large increase in daily use of the drug, compares the potency of 2019 pot vs. 1970s pot, and discusses that 11% of all the psychosis cases in emergency rooms - 90,000 cases, 250 a day - are triple the number in 2006. It also discusses the possible link to the violence of users.

I share this to provide an alternative look into the marijuana debate.

Let's now look at a few of the ways to invest in the marijuana market.

In summary, how do I invest in the pot market?

Everything discussed above smells of high risk, being thinly traded, high premiums, or being part of companies that so large that most pot-related sales probably will not move the profits of many of these large corporations. However, you might want to have a small basket of these stocks to see how things play out. Don't bet the farm or invest with money you will need in the short-to-mid term.

As a final takeaway, it is encouraging to see Fortune 500 companies beginning to enter this space. If you want to play in the market, beware of news that is too good to be true and spread your risks around.

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Disclosure: I am/we are long MJ. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Additional disclosure:

This article is intended to provide educational information to readers and in no way constitutes investment advice. Investing in public securities is speculative and involves risk, including possible loss of principal. The reader of this article must determine whether or not any investments mentioned in this article are suitable for their portfolio, risk tolerance, and accepts responsibility for their decisions. Neither information nor any opinion expressed in this article constitutes a solicitation, an offer or a recommendation to buy, sell, or dispose of any investment or to provide any investment advice or service. An opinion in this article can change at any time without notice.