Summary

  • Cannabis stocks are seeing catalyst movements upwards with the recent legalization of some 50% MoM;
  • MJ ETF is not adequate in following the top stocks for cannabis;
  • Putting together a portfolio with a tracker to follow upward movements in cannabis industry.

The cannabis industry is getting hot again. Very hot. I wanted to put together a synopsis of the cannabis industry while at the same time I wanted to look at some of the companies involved in the industry.

But, first, let’s look at how we got to this point.

Canada legalized cannabis in October of 2018. Truckloads of money poured into the industry hoping to capture green gold. Stocks were pushed upwards to valuations that rewrote the phrase “irrational exuberance”. However, despite the entire country running out of cannabis on day one, the returns investors were seeking never really materialized.

There were many issues that came with the cannabis rollout. The two biggest were that in one way or another, the provincial governments were highly involved in the distribution process and, secondly, too many companies built far too much production capabilities; there was a deluge of supply.

The regulatory process for cannabis is highly restrictive in Canada, as one would imagine. The licensing process can be long and arduous. And, in some cases, some of the provincial governments actually distribute the cannabis themselves.

When I hear that the government is involved in the process in a way that they actually sell the products, I start thinking of photographs of Eastern Europe during the 1980s prior to the collapse of the Soviet Block. Granted, Canada is far more sophisticated than mid-20th century Ukraine. At least, I hope. Still, the rollout was slow and problematic, and the results were evident.

There were, however, a small number of dispensaries in Canada prior to the rollout. This was due to the fact that medical cannabis was legal. It took a while but, slowly the number of dispensaries offering adult-use recreational cannabis in Canada climbed more and more. This gave access to more and more people to cannabis. With more local access came more sales. The charts coming out of Canada are impressive.

Everyone was going big. Legacy companies, desperate for growth of any kind, such as Corona Beer owner Constellation Brands (STZ), invested in Canopy Growth (CGC), while Altria (MO), who owns Marlboro Cigarettes, invested in Cronos (CRON); Molson Coors (TAP) got involved with Hexo Corp (HEXO). They dropped billions into these companies. This solidified the fact that cannabis was going to be a real thing. The headlines pushed these company’s stocks upwards. And investors flooded in.

With deep pockets, cannabis companies went all-in building their commercialized grow facilities. Some of the initial companies involved built up capabilities to process ginormous quantities of cannabis with full automation. They had the capability of processing large quantities quickly and efficiently. They utilized the most effective means possible.

To this point, at least one company, Aurora Cannabis (ACB) has entire grow rooms that are multiples larger than football fields where no human is ever allowed in lest they bring in contaminants. If they need the product, a machine just picks up an entire table the size of a trailer and hauls it to another location at the facility.

Think about that for a moment. These companies basically commoditized cannabis down to something akin to grocery store aisle vegetable products. These companies were holding inventory with margins similar to an onion.

The philosophy was quantity, not quality. It became a race for the bottom as companies were selling their products for less and less in competition with each other. The problem with that was consumers wanted quality, not quantity. And, what these companies could not sell they had to destroy and write off as a loss.

The stock prices of these companies sold off.

A front-row seat

Since 1990, I have lived in both California and Colorado, simultaneously, and have had a front-row seat to each state’s legalization process. Personally, I do not partake in the product; simply not my thing. But, I am a firm believer that if it is what you want to do, the government should stay out of your business and let you consume in the manner of your choosing.

California legalized medical cannabis in the 1990s. There was a growing business with this. Individuals needed to get a doctor’s prescription to partake in the product. It usually came with a fee and a wink of the eye. But, it was not until Colorado legalized in 2014 that the tide turned completely for cannabis throughout the whole world. At the time, cannabis was legal for medical purposes in Colorado. But, when voters went to the polls and voted to legalize recreational cannabis, everything changed.

Colorado was a bit of an experiment if you will. The laws were restrictive. But, the basic theory was that the product could be produced and sold in the state, regulated by the state, and safe for the state.

Naysayers, of course, said it would be the apocalypse for all of mankind and that this was a gateway to damnation. That, however, never really materialized. What did materialize was very impressive tax revenues; not to mention the spillover effects of no longer having to police possession of marijuana. And, the data, still a bit young, is saying just the opposite of the gateway as usage for other, harder drugs are showing signs of decline in the state.

I have seen and smelled on the streets and in the parks, the effects of the growth of the industry. I have seen tourists getting off of trains in downtown Denver, dragging their suitcases in tow while trying to match the map on their phones with where they were on the street in order to find an open dispensary. To myself, I always chuckle, “Colorado thanks you for spending money here”.

When stocks started listing in Canada, I started getting in. Hard. In fact, the only other thing I think that is going to head much higher is Bitcoin (BTCUSD). I invested in a lot of companies and I started building up what I thought would be a retirement portfolio of sorts. I figured I would be holding on to these stocks for many years.

There was green fever and I got equally caught up in it for a time. However, I also maintained a sense of rationality and wrote searingly on some stocks that were overhyped and overpriced, such as Tilray (TLRY), a company I have written about many times, yet have never said anything positive about. For the record, the stock has done nothing but go down during that time, exactly as I predicted.

I started writing here on Seeking Alpha and sharing my thoughts as an avenue to promote my thinking and the industry. At the same time, I saw value in telling people what I was thinking because usually, the exchange of ideas led to more knowledge instead of just being holed up in an office. This accountability would make me dig further and further in order to ensure my research was accurate.

I also chose Seeking Alpha for another reason. When they first started out, back in, what, 2005?, they were reposting blog posts of the best financial bloggers in the world. They had individuals out in Israel reading these blogs and reposting on their site - with permission, of course. My blog, long defunct, was one of the top 50 financial blogs in the world. I was one of Seeking Alpha’s original “Alphas”.

However, my dream of retiring on some beach was sidelined heavily because of a health issue. I own a coffee and chocolate business that sells South American and Central American coffee and chocolate. While traveling through the areas, inspecting plantations, I contracted a virus that laid me out in a hospital bed for 15 straight months; a big chunk of the time, I was comatose. My last rights were read. And, my portfolio in my private trust was liquidated per my instructions. The only good thing to come out of that was the timing; the liquidation happened about the peak of the cannabis moves.

Now, I am back and I am feverishly working through all of the stocks that are available to invest in. I have about 600 - 700 stocks that I am sifting through. It is a massive project but one that I think will be quite profitable over the longterm.

Since COVID has the world shut down, I am stuck inside with nothing else to do but work on this.

MJ Alternative Harvest ETF

Along the way, an ETF was created to follow the cannabis industry, the ETFMG Alternative Harvest ETF (MJ). I have never been in love with this ETF simply because it seems to be weighted towards certain stocks. My attitude towards that is if there is going to be a bias, why not just invest in the stocks individually?

At the same time, some of the stocks that are in the ETF are simply befuddling.

Nonetheless, the ETF gives a quick look at the general cannabis industry. And, right now that industry is starting to bounce off of its very lows; as this chart shows:


This chart was introduced in late 2015 and shows its entire existence. You can see the feverish fervor in 2018 that pushed this index upwards during that epoch. You can also see the long slow demise of enthusiasm for the industry all through 2109, bottoming out in March of this year. And, you can see the newfound interest in the industry as we are seeing the recent pops in some stocks back upwards that the industry is witnessing.

So, first up, what is the ETF?

According to ETF Database, there are 35 companies that make up the ETF. As was mentioned, I disagree entirely with the makeup that they chose, but let's look at it:


Ticker Symbol

Security Description

Shares/Par

Local Price

% of Market Value

% of Net Assets

MO

ALTRIA GROUP INC

548,076

43.00

2.39%

2.39%

BATS LN

BRIT AMER TOBACC

632,864

29.17

2.48%

2.48%

APHA

APHRIA INC

12,382,092

7.97

10.01%

10.01%

ARNA

ARENA PHARMACEUT

240,410

69.19

1.69%

1.69%

IMB LN

IMPERIAL BRANDS

1,273,467

15.78

2.69%

2.69%

ACB

AURORA CANNABIS

6,796,443

9.91

6.83%

6.83%

CGC

CANOPY GROWTH CO

2,960,378

26.53

7.96%

7.96%

CARA

CARA THERAPEUTIC

435,222

14.91

0.66%

0.66%

CRBP

CORBUS PHARMACEU

8,116,550

1.34

1.10%

1.10%

CRON

CRONOS GROUP INC

7,485,921

7.98

6.06%

6.06%

GRWG

GROWGENERATION CORP

1,618,046

32.74

5.37%

5.37%

HEXO

HEXO CORP

38,650,881

1.00

3.92%

3.92%

SWMA SS

SWEDISH MATCH AB

270,452

653.60

2.12%

2.12%

2914 JP

JAPAN TOBACCO

822,153

2,172.00

1.74%

1.74%

OGI

ORGANIGRAM HOLDI

19,703,700

1.37

2.74%

2.74%

PM

PHILIP MORRIS IN

286,100

85.00

2.47%

2.47%

SWM

SCHWEITZER-MAUDU

619,008

38.80

2.44%

2.44%

SMG

SCOTTS MIRACLE

129,329

190.22

2.49%

2.49%

TLRY

TILRAY INC-CL 2

6,984,327

7.77

5.50%

5.50%

TPB

TURNING POINT BR

548,213

43.85

2.44%

2.44%

XXII

22ND CENTURY GRO

6,698,258

2.54

1.73%

1.73%

UVV

UNIVERSAL CORP

510,619

49.56

2.57%

2.57%

VGR

VECTOR GROUP LTD

2,182,415

12.47

2.76%

2.76%

VFF

VILLAGE FARMS IN

4,107,421

9.69

4.04%

4.04%

ZYNE

ZYNERBA PHARMACE

1,817,201

4.04

0.74%

0.74%

ICA* MM

EMP ICA

155,893

-

0.00%

0.00%

XLY CN

AUXLY CANNABIS G

45,955,891

0.30

1.10%

1.10%

FIRE CN

SUPREME CANNABIS

6,779,114

0.19

0.10%

0.10%

TGOD CN

GREEN ORGANIC DU

38,370,424

0.25

0.76%

0.76%

LABS CN

MEDIPHARM LABS C

11,972,641

0.60

0.57%

0.57%

CWEB CN

CHARLOTTES WEB H

6,409,206

5.83

2.97%

2.97%

VLNS CN

VALENS CO INC/TH

11,003,156

1.72

1.50%

1.50%

GWPH

GW PHARM-ADR

622,340

120.43

7.60%

7.60%

This ETF loses me on line one. What does Altria have to do with cannabis? Oh, yeah. I already mentioned that. They are invested in Cronos. And, as far as I could tell, that is all they have to do with cannabis. So, that means Cronos’ representation is skewed. That also means that the ETF is skewed to 'odd'. That is about the only term I can come up with.

The last time I checked, Altria was selling off over what is a long stretch with almost nothing propping it up. I can’t really remember because it is primarily a tobacco company and I am only interested in cannabis. And, yet, this is something that is weighing down the ETF.

Then, in line 2, there is British American Tobacco (BATS). How are they involved in cannabis? They have researched CBD and THC. That is it. That is all I could find. Again, another tobacco company that skews the ETF in a different direction for different reasons.

There are other issues throughout this list, so you get the gist of why I’m not really interested in this ETF. It really is not much of an ETF based on cannabis.

My Own ETF, of sorts

Because of my misgivings with the aforementioned ETF, I wanted to put together a basket of stocks myself and see how the industry would progress.

I have two spreadsheets that have various stocks, one with about 300 stocks the other with about 600 stocks all, in some manner or another, intertwined with the cannabis industry. I am trying to marry the two together, but it is time-consuming. It will happen. There are some flaws with some of the stocks in these lists. The majority are simply too small, and by extension, risky, to even consider. Some may no longer be in business; there may be an impending merger with a company, or maybe there is a CEO going to prison after driving the company into BK. Simple things like that kind of disqualify a stock from consideration.

What does qualify a stock is how Seeking Alpha looks at stocks. Seeking Alpha loves when contributors contribute content. They really love - and, a lot more so lately - when contributors contribute content on stocks that are written about infrequently. I have tried to use what Seeking Alpha has to say as a general guideline.

These stocks have a minimum capitalization. They have their hands on cannabis in some fashion or another (I have removed suppliers of grow equipment, and such). They report earnings on a quarterly basis and have an earnings teleconference.

Within these parameters, here are the first 50 stocks that I am going to use as a benchmark as to how cannabis stocks, in general, are doing; I will add more as I work through my lists.


Symbol

Price

52W Range

5D Perf

1M Perf

6M Perf

YTD Perf

1Y Perf

3Y Perf

5Y Perf

ACB

9.91

3.83

30.48

-9.00%

29.37%

-23.24%

-61.77%

-66.29%

-85.49%

95.74%

ALEAF

0.41

0.22

0.56

-4.61%

4.62%

-0.49%

-11.69%

-14.11%

-

-

APHA

7.97

2.13

8.49

-6.12%

43.60%

87.97%

52.68%

62.99%

-27.07%

787.53%

AYRWF

-

-

-0.26%

27.47%

203.08%

131.02%

151.98%

-

-

CARA

14.91

9.12

17.92

-1.13%

-4.85%

-0.40%

-7.45%

-8.81%

18.90%

-1.71%

CBSC

1.00

0.07

2.24

-6.54%

-28.57%

96.08%

1900.00%

1900.00%

132.56%

-21.57%

CBWTF

0.23

0.09

0.57

-15.31%

-4.28%

-3.00%

-45.48%

-49.39%

-66.03%

-

CCHWF

4.75

1.25

4.88

-2.56%

22.42%

72.73%

90.76%

102.13%

-

-

CGC

26.53

9.73

29.00

-7.21%

9.40%

66.75%

25.79%

31.01%

71.17%

1230.96%

CNBQF

12.47

1.00

12.87

-0.54%

49.92%

607.19%

523.28%

491.74%

-

-

CNPOF

0.79

0.39

1.17

-18.23%

14.79%

-8.23%

-10.80%

-14.11%

-

-

CRBP

1.34

0.94

9.38

-5.63%

9.84%

-80.00%

-75.46%

-72.76%

-80.99%

-15.19%

CRLBF

9.95

2.05

10.76

-7.52%

18.45%

137.19%

45.09%

65.83%

-

-

CRON

7.98

4.52

8.85

-7.53%

12.08%

24.30%

4.04%

17.01%

121.67%

-

CTGL

0.10

0.02

0.54

0.00%

-9.09%

-44.44%

292.16%

521.12%

-77.27%

-

CURLF

11.93

2.64

12.28

-2.81%

13.72%

123.07%

89.14%

99.57%

-

-

CURR

1.65

1.04

3.00

-4.36%

58.17%

-3.80%

-45.17%

-31.46%

-17.75%

-

CWBHF

4.58

2.34

8.82

-13.22%

20.58%

-19.08%

-40.34%

-47.19%

-

-

FFNTF

0.81

0.20

0.91

-11.10%

21.75%

107.91%

79.27%

81.08%

-

-

GRWG

32.74

2.87

35.59

-6.51%

56.35%

397.57%

698.54%

614.55%

932.81%

-

GTBIF

21.74

4.08

21.94

1.14%

7.04%

138.90%

122.97%

162.88%

-

-

GWPH

120.43

72.48

140.08

-12.41%

1.60%

-0.58%

15.18%

17.06%

-1.73%

59.85%

HERTF

0.11

0.06

0.23

17.73%

1.19%

10.90%

-40.82%

-28.03%

3.84%

438.35%

HEXO

1.00

0.36

2.17

-7.41%

28.39%

5.55%

-37.11%

-54.34%

-63.01%

-

HRVSF

2.00

0.57

3.57

-3.16%

8.42%

96.55%

-36.75%

-14.38%

-

-

JUSHF

4.19

0.73

4.52

-5.06%

50.22%

281.67%

203.40%

268.89%

-

-

KSHB

0.90

0.32

2.07

-12.25%

19.26%

-1.65%

-45.43%

-44.06%

-70.07%

-

LHSIF

0.38

0.27

0.56

-6.25%

1.49%

6.25%

-19.23%

-26.85%

-66.21%

-

MEDIF

0.45

0.40

3.33

-8.55%

-24.17%

-64.03%

-85.01%

-82.55%

-

-

MMNFF

0.15

0.11

0.71

-17.88%

6.29%

-36.88%

-71.48%

-65.13%

-

-

NBEV

2.95

1.04

3.43

-11.94%

3.15%

89.10%

62.09%

58.60%

31.70%

742.86%

NEPT

1.55

1.02

3.23

-9.36%

-21.72%

-43.01%

-43.64%

-45.23%

-20.51%

40.91%

NXTTF

0.17

0.17

0.49

-7.03%

-7.13%

-43.42%

-26.43%

-28.33%

-79.76%

-79.76%

OGI

1.37

1.01

3.40

-5.52%

11.38%

-24.73%

-44.08%

-46.48%

-56.92%

120.97%

PLNHF

5.66

0.70

6.09

-2.92%

53.80%

243.03%

188.78%

268.97%

-

-

ROMJF

2.81

1.08

3.38

-0.69%

-8.01%

54.30%

93.54%

180.82%

-

-

RWBYF

0.51

0.03

0.92

-3.08%

-15.00%

-25.57%

-36.25%

-32.18%

-

-

SIGA

6.96

3.99

7.76

-0.29%

-4.53%

22.97%

45.91%

49.04%

39.48%

1165.45%

SOLCF

2.19

0.11

2.37

-0.45%

31.86%

421.43%

377.75%

563.23%

-65.72%

-

SPRWF

0.14

0.09

0.51

-8.39%

38.83%

-35.73%

-70.82%

-70.21%

-90.53%

-45.04%

TCNNF

30.59

6.00

31.35

0.76%

15.87%

150.74%

158.38%

157.06%

-

-

TGODF

0.20

0.16

0.60

-11.19%

4.35%

-32.83%

-65.26%

-65.26%

-

-

TLLTF

0.27

0.11

0.59

-15.63%

-23.40%

-42.68%

-3.57%

-9.11%

-

-

TLRY

7.77

2.47

21.36

-9.65%

-3.36%

-7.17%

-54.64%

-57.31%

-

-

TRSSF

9.70

1.30

10.69

-4.40%

33.29%

331.28%

343.10%

442.11%

453.05%

-

VFF

9.69

2.23

11.36

-9.86%

47.94%

67.65%

55.54%

59.90%

81.00%

1492.18%

VLNCF

1.36

1.11

3.04

-9.94%

-1.45%

-34.55%

-48.09%

-38.53%

51.06%

-

XXII

2.54

0.56

2.83

50.30%

215.45%

191.92%

130.91%

178.36%

-9.93%

115.25%

ZLDAF

0.07

0.02

0.07

20.69%

37.25%

71.91%

59.09%

84.21%

-30.00%

-

ZYNE

4.04

2.90

6.54

-11.21%

6.88%

-14.59%

-33.11%

-27.99%

-64.56%

-69.37%

Some of these stocks I have written about and others are on my list of things to do. Some of these stocks I have added to my portfolio. Others, I will not.

These numbers and their formatting are from a portfolio that I put into Seeking Alpha’s portfolio tracker in my own account. It actually gets the job done nicely since one of the things I think is important is 5-day return, 1-month return, and so on.

Looking at some of these stocks, there are some standouts that I wanted to point out. There were 37 stocks with a positive return and the other 13 stocks were negative on a 30-day basis. The catalyst for a lot of the movement in the stocks from their highs is the legalization of cannabis on the ballots of several states in November.

  • Aurora Cannabis had a 1-week move downward of 9% but is up 29% for the month which means if the stock was flat for the week there would have been a 38% move higher in just one month;
  • Aphria is up 43% for the month;
  • Canopy Rivers, the investment arm of Canopy Growth, is up ~50% for the month;
  • Cure Pharmaceuticals is up 58%;
  • Grow Generation is up 56%;
  • Jushi is up 58%;
  • Planet 13 Holdings is up 53%;
  • Sol Global is up 32%;
  • Supreme Cannabis is up 38%;
  • Village Farms is up 47.9%;
  • 22nd Century is the clear standout with a 215% increase for the month;
  • Zelira Pharmaceuticals is up 37%;

There are a couple of notable downward moves, as well:

  • CBSC is down 28%;
  • Neptune Wellness is down 232% for the month;
  • TILT Holdings is down 23% for the month.

First, my thoughts on the legalization of cannabis by several states during the election. If these companies can get into these states and offer their products, then yes, that would be a reasonable catalyst for the stocks to head higher as they have been. But, this of course comes with costs and I do not see this alone as being the Holy Grail of reasons for buying into individual stocks.

There is also the passage of the cannabis bill by the House of Representatives. I see this as ceremonial and a slap in the Senate’s face, as well as Republicans. Mitch McConnell will have none of this and it is likely to die a slow death without consideration in the Senate Committee. Even if it did make it out of committee, Mitch would likely kill it in the pile and just wait for the new Congress to start on January 2nd. If that did not stop things, then there is an outgoing President who likely has no reason whatsoever to agree to anything that the Democrat-led House has to say. This bill will die. Period.

But, at least it is a step in the right direction.

Also, I see a lot of comments regarding the UN’s vote on the subject. This is kind of interesting in the sense that it shows international interest in the legalization of cannabis. However, the UN is kind of a nothing body that has no ability to pass legislation that would compel governments around the world to act accordingly and legalize cannabis in one manner or another. The UN passage was ceremonial, as well. But, I will reiterate that it is interesting because of international acceptance.

If I were to be a betting man, I would say that Mexico will be the next country to legalize cannabis. Given that, having cannabis legal both north and south of the United States, that could compel the government to actually doing something. That remains to be seen.

Still, the cannabis industry has gotten a bit of a boost from the recent news. For me, though, I am looking more towards the actual numbers that companies are printing.

More and more, I am finding companies are getting closer and closer to printing positive earnings reports. This is where I am driven with my analysis. If the data says there is positive momentum then, you go with the data. And, from what I am seeing, there is positive momentum in the industry and we are likely to see this continue.

My Intention from this

First off, I am hoping to be able to pick some real winners for my portfolio with all of this. Along the way, I am trying to really dive in as deeply as I can, within some constraints of time during the day and other commitments that I have. But, with the virus having shut down the entire world, this is probably the very best time for me to be going deep into analyzing these stocks. At the same time, I believe we’ve just seen the bottom in the cannabis industry and are now moving higher. Perfect timing.

Since I am as active as I am, my hope is that I can report on this on a weekly basis. I hope to have updates within each of these articles showing where the industry is heading and progress being made.

I also hope to have enough time to work through all of the companies that I have in each of my spreadsheets so that I can add in more stocks into this hypothetical portfolio. I would think that if I could get the top 100 stocks, with the highest valuations and adequate information to make an educated investment decision, and ample liquidity, then that should be good enough. Also, I would like to be able to have a secondary listing of the remaining stocks just to show what the rest of the industry is doing as well. It is a lot of work and hopefully, it works out well.



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