You’re reading a copy of this week’s edition of the New Cannabis Ventures weekly newsletter, which we have been publishing since October 2015. The newsletter includes unique insight to help our readers stay ahead of the curve as well as links to the week’s most important news.
The cannabis sector, as measured by the New Cannabis Ventures Global Cannabis Stock Index, has almost doubled since mid-March, and we think that we are in the early stages of a bull-market, something we discussed two weeks ago. We have noticed a considerable pick up in trading volumes and interest in the sector.
Many investors who want to capitalize on certain sectors of the market will invest in exchange-traded funds (ETFs), which offer the ability to participate by purchasing a single security that will give them diversification rather than trying to pick individual stocks. While in theory this can make a lot of sense, this would be, in our view, not the best way to take advantage of improving cannabis stocks.
Launched in late 2017, ETFMG Alternative Harvest ETF (NYSE ARCA: MJ) seems to offer investors a lot: good liquidity and exposure to 36 stocks, with an annual management fee of 0.75%, which is more than offset by its security lending income. The fund, though, is very heavily exposed to the largest Canadian Licensed Producers (LPs). Here are the largest holdings as of June 6th:
The five largest LPs, Aphria, Aurora Cannabis, Canopy Growth, Cronos Group and Tilray, account for over 31%. At 420 Investor, we don’t include any of these currently in our model portfolios, as we find much better value in other parts of the market, including smaller LPs, who have controlled their costs much better and have executed with sharper focus, as well as retailers in Canada. These five LPs account for about 13% of the Global Cannabis Stock Index, so the MJ ETF is loaded up with a part of the market that doesn’t make a lot of sense right now.
The MJ ETF looks very different from the Global Cannabis Stock Index in many ways. In this table below, we compare it to both the index as well as the 420 Quality model portfolio we share with subscribers at 420 Investor:
We note that the ETF continues to hold several securities that have no real exposure to the cannabis sector, like Corbus Pharma, Arena Pharma and Swedish Match among the top holdings, as well as British American Tobacco, Imperial Brands, Japan Tobacco, Philip Morris, Schweitzer-Mauduit, Turning Point Brands, Universal Crop, Vector Group and Zynerba. This non-cannabis exposure may have helped returns for the ETF during the bear market, but they will likely hurt performance in a bull market.
Besides a massive bet on the largest LPs and exposure to non-cannabis companies, the ETF misses what we think may be the very best part of the market: American cannabis operators and ancillary companies. The bullish thesis for the U.S. is that companies are generally more profitable than in Canada, with the industry poised to benefit from what we expect will be a move to more states legalizing as well as better conversion of the illicit market given the ability to implement delivery and order-ahead in many markets, something we expect to continue in the future.
The MJ ETF has exposure to ScottsMiracle-Gro, which has a large ancillary business, but that’s it. The Global Cannabis Stock Index includes, along with ScottsMiracle-Gro, Akerna, GrowGeneration, Innovative Industrial Properties, KushCo Holdings and Power REIT as ancillary companies, cbdMD, Charlotte’s Web, and CV Sciences in the CBD space and several MSOs, and MJ includes none of these.
The largest LPs, all of which are generating operating losses and are valued substantially higher relative to revenue or EBITDA than the largest MSOs, have been lagging them in the market, a trend we expect to continue. The five largest LPs have returned an average of -28.5% (-14% to -46%) year-to-date, while the four largest MSOs in terms of market cap, Cresco Labs, Curaleaf Holdings, Green Thumb Industries and Trulieve, have returned an average of -5.1% (11% to -29%). The ancillary companies have been performing well in 2020 as well.
Investors who buy the MJ ETF are likely, in our view, to be locking in sub-par performance in the months ahead, as they have very limited exposure to the American cannabis market.
Helping cannabis investors navigate a new sector since 2013.
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Alan & Joel