The Marijuana Basket

The Marijuana Basket

This is a portfolio, dubbed the “marijuana basket”, built around the wave of growth in the marijuana industry.  It is rapidly growing, highly controversial and still federally illegal in the United States.  There’s no secret there has been a wave of both capital and momentum from populations behind the movement.  It remains to be seen whether ultimately the US government legalizes marijuana though Canada has recently passed legalization legislation there.  As a result, some components of the portfolio are Canadian in nature.

Legalization has begun spreading around the world, taken from Wikipedia:

As of 2018, some of the countries with the laxest cannabis laws were Australia, Canada, Chile, Colombia, Costa Rica, the Czech Republic, India, Israel, Jamaica, Mexico, the Netherlands, Portugal, South Africa, Spain, Uruguay, and some U.S. jurisdictions. Some of the countries with the strictest cannabis laws were Indonesia, Japan, Malaysia, France, Poland, Saudi Arabia, Singapore, South Korea, Taiwan, Thailand, Turkey, Ukraine, and the United Arab Emirates.

The portfolio is housed within a Google Sheet so any change I make will be immediately visible.  Let’s jump into the portfolio and then I will expand my thoughts.

marijuana

The Portfolio

The Setup

I faced some challenges setting up the portfolio due to where these stocks are traded.  Many marijuana stocks are traded OTC (“over-the-counter”) which is a nice way of saying not traded on one of the major stock exchanges.  It’s done between two parties and there can be wild swings due to (among other reasons) low liquidity.  Aurora Cannabis and Canopy Growth Corp both trade in this fashion.  They are also not able to  be traded on a platform like Robinhood.

I recently started using Robinhood to complement my existing Schwab account.  I love the idea of commission free trades and options trades.  As cool as the platform is, it still is more barebones than a full service provider like a Schwab.  I’m just using this is a high level overview, I’m not getting paid by either of these companies.  Part of the angle of buying one of these portfolio baskets is keeping trading costs as low as possible.  Therefore, when possible, I am buying these stocks in my Robinhood account.  Robinhood does not support OTC stocks so both Aurora Cannabis and Canopy Growth reside in my Schwab account.  The other three holdings; CRON, GWPH and SMG are in Robinhood.

The View From 30,000

I believe we are still in the early stages of a nascent industry and we are beginning to see some early signs of consolidation in the industry.  Smaller players are being bought out by larger fish as the industry sorts itself out.  The first picks in the basket comprise some of the biggest growers in the space.

Aurora Cannabis (ACBFF)

Aurora is the second largest grower in the space behind Canopy Growth Corp.  Recently the company announced a merger with the third largest player MedReleaf.  Should the merger go through, it should vault the merged company in to the top spot in terms of raw market cap.  Canada is expected to fully legalize marijuana by late summer.

Canopy Growth Corp (TWMJF)

As mentioned in the brief for Aurora, Canopy Growth is currently the largest public player in this space.  I feel it is prudent in an early industry to place several bets on the front horses as they have the early mover advantages.  Last fall, alcohol company Constellation Brands shook up the marijuana world by buying a minority stake in Canopy Growth.  Having a “traditional” company such as Constellation helps provide the “adult in the room” vibe.  Canopy is also in the process of listing on the NYSE under the ticker CGC which should be by the end of May.  Being listed on a traditional exchange such as the Nasdaq or NYSE ultimately can lead to them being included in the S&P 500.  Being in the S&P 500 provides constant funding by the other trend of passive investing.  In my opinion inclusion in the index is highly underrated.

Cronos Group (CRON)

In February, Cronos Group announced it was moving over from the Canadian OTC exchange to the Nasdaq.  This move will help improve liquidity which ultimately will allow institutional investors to take positions in the company.  Part of this process coming to fruition is having the large institutions buying in as their clients ask for exposure to the marijuana industry.

GW Pharmaceuticals (GWPH)

After exposure to the main growers in the space, I shifted angles here by looking at a legitimate medical use for marijuana.  GW Pharmaceuticals is awaiting FDA approval for its drug Epidiolex.  Epidiolex has been used to treat children with severe forms of childhood epilepsy.  By severe, think of having 40 or so seizures a week!  One patient in particular had been having 40-50 per week and during the drug trial it dropped to to a few or even zero.  With properly collected data they showed a 40% reduction in the amount of seizures.

Scotts Miracle-Gro (SMG)

The last company is Scotts Miracle-Gro.  Yes, the company making all of your lawn products is finding itself in the middle of the marijuana revolution.  Besides the obvious applications that some of their consumable chemicals can have for growing strong, healthy plants quickly comes their recent acquisition of hydroponics company Sunlight Supply.  Scotts already has exposure in this space so this acquisition plays into their wheelhouse.  The angle here is playing the “pickaxe and shovel” to the marijuana growers.

In fact, the company seems reasonably valued based on traditional fundamental metrics.

After pulling back from about $108 last year, the share price sports a better-than-the-market dividend yield and the company has an 8 year dividend growth streak.  With nearly 20% earnings growth expected, the P/E of 22 seems quite reasonable.

Conclusion

That is my marijuana basket with a high level overview of the selections.  I’ll highlight again that this basket of companies in aggregate is still fairly speculative.  This is my attempt at what may be a long-term trend.  I have to point out this may not work and I have planned for that by having this basket be an appropriately small allocation of my portfolio.

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.