The Cannabis Skeptic

July 01, 2019

When the former Tierra XP Latin American Real Estate fund (LARE) changed its entire portfolio to invest in cannabis stocks instead of Brazil residential developments or Mexico hospital projects (and changed the ticker to MJ), it caused a huge ripple through the industry.

The rebranded ETFMG Alternative Harvest ETF (MJ) currently has just over $1.1 billion in assets under management (AUM), a far cry from the less than $10 million in AUM LARE held.

While I like to think we gave the move the skeptical eye it deserved, the overwhelming watercooler conversation was simply, “Can they really do this?”

The “do this” in this case was “invest in companies that are doing something illegal under U.S. law.”

Jumping Through Hoops

To do it, they had to jump through significant hoops, going so far as to abandon the traditional operational providers for ETFs in favor of a custodian and transfer agent that have no experience with ETFs.

They made that unusual move because it wasn’t clear to the ETF’s original custodian, U.S. Bancorp, that they wouldn’t get in hot water with federal banking regulators for supporting felonious activities.

But since then—almost two years later—it seems those concerns have been allayed. There’s even an actively managed competitor to MJ now, the AdvisorShares Pure Cannabis ETF (YOLO), with $56 million in AUM since launching in April, that came to market with its own take, and more competitors are on the horizon.

The Case For Cannabis

The bull case for cannabis stocks is pretty straightforward. Growing legalization—around the world, not just in the U.S.—creates a once-in-a-generation opportunity to invest in a brand new industry.

That just doesn’t happen very often, and like any huge disruption, there will be some big wins, and some big losses. But with such a small investable universe, is it possible to construct a good portfolio? MJ, for example, has 60% of its money in just 10 stocks. And cannabis portfolios inevitably look like a bizarre combination of innovative biotech stocks, and, well, farmers.

The core business of cannabis, at the end of the day, is agriculture. The differences between, say, an apricot grower in California, and a cannabis grower in Oregon, is largely one of details. Yes, they have different regulatory regimes, markets and distribution systems, but ultimately, this is a business about extracting plant matter from soil, light and nutrients just the same.

And while I’m sure there’s enormous expertise involved, it strikes me that the barriers to entry here are quite low.

Supply Outpacing Demand

Precisely because of these low barriers to entry, it’s not uncommon to see headlines like this one: “Oregon Marijuana Market Has Too Much Weed, Price Is Dropping.” In fact, the Oregon supply problem is so great that the state government just passed a bill allowing Oregon farmers to export across state lines.

Currently, no state allows this (to say nothing of the Commerce Clause), which sets up what seems like an inevitable court case as soon as truckloads of medical-grade cannabis start crossing Oregon’s borders.

But whatever skepticism I may have doesn’t seem to leach into the market psychology. Cannabis ETFs have pulled in more than $500 million in 2019 so far, despite a wild ride that saw them roar up 50% in the first few months of the year, only to decline 15% in the past three months, while the broader markets have edged higher.

Can A Skeptic Be Convinced?

While I remain fascinated by the cannabis market, I admit, as an investor, I’m still pretty skeptical (something I share with a lot of ETF folks).

Between the unstable regulatory environment and the “ain’t this just farmers?” angle, I’ve sat on the sidelines watching and stroking my nonexistent beard. So in that light, I’m excited to have an opportunity to really dig in and debate the issue.

Next week, I’m going to sit down with a group of cannabis pros and put my skepticism to the test.

Join Us

First, I’ll be joined by our own Lara Crigger. Lara’s been covering the cannabis ETF scene for us here at ETF.com for the past few years, and it’s safe to say, she knows how the sausage is made.

We’ll also be joined by famed investor Jon Najarian, who’s recently been quite public in his advocacy for the cannabis industry on investment grounds. And last, we’ll have Matt Markiewicz from Innovation Shares, who’s launching a cannabis ETF in the coming weeks.

The point of this session is to cut through the hype and get to the core investment thesis here. What’s the state of play in Congress? Will cross-border sales stabilize the industry and set the stage for growth? Will medical research yield blockbuster opportunities? Will consolidation boost the public companies or just drain their coffers with endless acquisitions? And what’s the international picture?

We’ll be in studio next Tuesday, hashing out live on camera, and I hope you’ll join us. Are you a skeptic? Come ask your tough questions.

Are you a cannabis bull? Come hear from some of the best on what may be in store for your investments. This is sure to be one of the liveliest discussions we have all year. I hope you’ll join us.

Dave Nadig can be reached at [email protected]

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