WASHINGTON: Back in January, we created a bit of a stir when we focused on the evolving – and dicey – fine art of marijuana investing. For traders interested in taking a chance on cannabis, we ran a pair of columns focusing on “covert” marijuana stocks and the headline risks involved in courting Maryjane.
Those headline risks continue, as marijuana, marijuana companies, and the battle between legalized weed for both medical use and recreational use continues.
For that reason, we thought we should update our initial investment marijuana forays, as economic chaos and headline risk continue to dance with investors’ better investment bets in this tiny but intriguing investment area.
Like many startup industries – take personal computers, for example – publicly traded cannabis-based companies and ETFs alike are inherently high risk. That means that income investors and conservative investors might want to stop reading right here. These volatile investments are not for you.
On the other hand, those of us of a certain age might still regret that we didn’t pile into shares of Microsoft (symbol: MSFT) or Apple (AAPL) back when nobody gave much of a damn about these hobbyist “toys” that most people would never want or use. Anyone who bought and held these two, or a few other stocks through good times and bad is now far richer than you or I will ever be.
That said, most “silly idea” startup industries still amount to nothing, or else we’d all get instantly rich by pursuing them regardless of perceived risk. But that’s not the case. And, as we saw in the 1999-2001 dot.bomb tech wreck, a great many highly-touted startups crashed and burned, along with a great many once-promising stock portfolios.
The lesson here is that a few dicey startups eventually become big winners. But they often take a long time to achieve that status. (Trendy companies like Facebook [FB] and Twitter [TWTR] excepted.) The rest of these startups usually end up in the proverbial dustbin of history.
Which gets us back to the marijuana patch. As we explained in our previous articles, most marijuana-only stocks are essentially penny stocks with dubious odds of long-term success.
Furthermore, most of them are listed on Canadian exchanges, i.e., the Toronto exchange. That means that American investors can buy some of them through their regular brokerage accounts. But others can only be bought if you also have the capacity to trade on international exchanges where commissions can be crushing.
The bulk of marijuana stocks are shares of organizations that grow, sell, or distribute medical marijuana. And allegedly nothing else. The bulk of these stocks represent Canadian companies, largely because Canada okayed medical marijuana use some time ago. The U.S., on the other hand, is still wrestling with Federal vs. state issues. Namely, marijuana is essentially illegal, period, as far as the Feds are concerned.
But a number of states have defied Federal law by allowing medical marijuana – and in some cases, recreational marijuana – to be cultivated, bought and sold to your average Joe Sixpack for fun and profit, in addition to medical use.
Hence, the ongoing headline risk for marijuana stocks and ETFs. While Canada is a stable market for at least medical maryjane, the U.S. is not. At least until courts start ruling on this issue.
Every time the Feds crack down on marijuana sales and use anywhere in the U.S. and/or win a district or appellate court battle, these stocks will get hammered. On the flip side, if the states win a round or two, particularly where recreational marijuana is involved, these stocks and/or ETFs are likely to skyrocket. That’s because the “floats” in these investment vehicles – i.e., the number of shares outstanding to trade – is very thin when compared, say, to the number of outstanding shares of Apple.
In other words if big buy or sell orders hit these investments, they will move. Hard. And fast. So there’s your risk.
In our earlier articles, without particularly endorsing anything, we averred that for now at least, the best way to give marijuana stocks a test-drive in your portfolio would be to purchase shares of a marijuana ETF.
Things have continued to evolve in the industry and in related ETFs since we published our first pair of articles on this topic.
As of today, mostly non-speculative investors have a choice of two reasonably constructed marijuana ETFs. One is Canadian and trades on the Toronto Exchange. The other is U.S.-based, and trades on American exchanges.
A Canadian cannabis ETF
Horizons’ Marijuana Life Sciences (HMLSF), which we didn’t discuss in our earlier articles, is at the moment the biggest ETF in all things cannabis. Its shares represent holdings of over C$700 million in total assets under management (AUM). That’s because HMLSF invests in a variety of companies. It not only holds numerous marijuana producers. It also holds stocks in life sciences companies, broadening its coverage. One potential downside: almost 50 percent of this cannabis ETF’s holdings consist of the top 4 cannabis limited partnerships. That could make for scary trading should any of these companies experience some kind of severely adverse event.
This ETF actually pays a dividend. But remember: Like all foreign dividends, this one gets taxed by the home country before what’s left of the dividend goes into your account. Better news: If you file your U.S. tax return using the long form (1040), you’ll get that money back via the “foreign tax credit” when you file.
(But check on this. Online tax forms via TurboTax and other tax software companies are still being updated to reflect last year’s complicated but substantial GOP tax cut legislation.)
A U.S. cannabis ETF
ETFMG Alternative Harvest (MJ). ThisETF is the largest U.S.-based ETF. Like HMLSF, MJ also holds the largest Canadian cannabis companies in its broad portfolio. How does it differ from HMLSF? MJ additionally holds international cannabis companies and also broadens its base by holding major international tobacco companies as well.
(Note:The symbol for this ETF – MJ – used to be MJX. Evidently, the symbol changed, and now it’s MJ. We’ll go back and correct our earlier article once we post this one.)
Why? Simple. Like any large company, tobacco companies want to survive and prosper. But that task has become increasingly difficult due to the never-ending desire of U.S. and international governments to help themselves to as much of the tobacco industry’s profits as possible.
But for that reason, it’s been a logical choice for these companies to slowly enter various facets of the infant marijuana industry. After all, if at least some recreational marijuana use becomes legal, tobacco companies could make money in this area, theoretically without government rent-seekers taking their profits. At least for now.
That’s why tobacco companies constitute part of MJ’s portfolio. In addition, as we reported in our earlier coverage, another MJ holding is – hold on to your hats – Scott’s Miracle Grow (SMF). Believe it or not, Scotts, long beloved of tomato and vegetable growers (like me) who do not adhere to the organic religion, is offering an increasing number of products geared toward commercial marijuana growers. Smart move, Scott’s. If maryjane becomes a big deal, you guys will be in the driver’s seat. If not, it will be easy to shut down a small, unprofitable division. And there will always be tomatoes.
So: To invest or not to invest? In cannabis? That is the question.
We have yet to make up our minds on this one. But at this point, with determined sellers pounding the entire market, we find it tempting to purchase shares of one or both ETFs at bargain basement prices.
Although we believe that both these ETFs are much safer than individual marijuana companies, at least at the moment, we still regard them as speculative at the present time. That’s why we’d allocate them to the small “spec” part of our portfolio.
Your spec portfolio should consist only of “mad money” you have concluded that you could easily part with without shedding a tear. Ditto spec stocks you purchase with that mad money.
In other words, treat this part of your portfolio like you would if you decided to gamble X dollars on Vegas slot machines, and play until you either hit a jackpot or lost your entire kitty. That way, you have a chance to win, but if you blow your set amount, well, what the heck? You set a limit.
Perhaps some day in the future, marijuana stocks and ETFs will become a truly legitimate part of U.S. and international stock markets. But right now, they’re purely spec. So travel at your own risk. And watch out for those headline risks. Particularly if President Trump and AG Jeff Sessions don’t get on the same page of the ongoing cannabis saga.