marijuana

Introduction

Lately I’ve been researching long-tail trends that may turn into large alpha opportunities for investors.  Today I’m launching the marijuana basket as a first theme in this series.  You can find the stock selections with background stories here (opens in a new tab).

Why Marijuana?

This is obviously a topic that is still highly controversial and an industry nascent in nature.  Besides the obvious legal and regulatory hurdles, there are mountains of research covering both the medicinal and recreational side of this field.  Again, the opportunity here is a trend that is gaining momentum both in the United States as well as abroad.  Canada legalizing recreational marijuana use (starting in July 2018) was a major step forward in this movement.  As you may know, several states have legalized recreational marijuana use though it is illegal federally.  There are different levels of legalization, out of scope for this piece but can be found on Wikipedia here.

Though it may be hard to quantify, there is a large addressable market both domestically and abroad for legal marijuana.  In fact, this movement has the potential to be larger than the beer market.  At a minimum this trend could steal revenue from alcohol companies.

Why Themes?

Theme investing is a way to try and capture investment opportunities in an area supported by long-term trends.  The goal is to generate alpha (returns over what the market will give you).  The fundamentals are hard to quantify by nature.  I wouldn’t let that be a showstopper, people have been doubting Amazon for over twenty years and $700B+ market cap later.  Additionally, these ideas tend to be underrepresented in a cap weighted index like the S&P 500.  There is an opportunity due to the lack of consensus in the market.  Once everyone agrees that yes, this theme is valid, the bulk of gains have already been captured.

The Basket Approach

A basket approach is used for a few reasons.  First is diversification within a space.  There are many areas of any industry and marijuana is no different.  Here are a few ways to play this space:

  • Companies that supply products to the growers
  • The growers themselves
  • The “value-add” companies
    • Recreational use (delivering branded products to end users)
    • Actual clinical medicinal use (think pharmaceuticals
  • The retail dispensaries
  • This could even trickle down to major cigarette companies like Altria or Philip Morris
  • Off-shoot businesses that may benefit either directly or indirectly (think marijuana tourism in Colorado)
  • And more

From this still being a burgeoning industry there are no clear winners as of yet in any regard.  There are large scale billion dollar growers that have early mover advantages that may be hard to make up.

What Kind Of Exposure?

The exposure you are comfortable with is a completely personal matter.  This is a very small allocation of my portfolio (about 1%).  I also have a long term investing horizon to let this theme play out, your individual circumstances may not allow that.  There is still a lot of uncertainly and risk, not mutually exclusive by the way.

Conclusion

I have other theme ideas I am currently working on and will announce them in the coming weeks.

The information presented here is for information only and should not be construed as investment advice.  Always perform your own due diligence before making any investment decision.

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