If you’ve surfed any financial news website in the last few years, you’ve undoubtedly seen the headlines touting the limitless profit potential of marijuana stocks.
Mainstream financial news sites are increasingly offering analysis of the space. Some discussions is actually quite good too, with plenty of well-meaning talk from momentum traders and chart watchers without stoner clichés or moralizing over the product.
That’s probably particularly true this week, after some big moves in the most-followed marijuana names, including a massive surge in Tilray Inc. TLRY, -11.46% and an equally massive decline for one-time darling Cronos Group CRON, +3.66% CRON, +2.37% .
Beyond the usual business risks, there’s now this: Will foreign investors in the pot industry be turned away at the U.S. border?
Whether you’re looking to swing trade this volatile sector or whether you simply want to know what all the fuss is about, here’s everything you need to know about marijuana stocks right now.
What the latest policy news means
It’s crucial to remember that with a captivating trend-based theme like marijuana stocks, the narrative often matters more than the facts. As with a company like Tesa Inc. or a hot theme like 3-D printing stocks, hard investing metrics often matter less than the stories people tell — and the potential they see regardless of the facts of today.
And sometimes the stock can’t keep up with the hype.
At its core, an investment in marijuana stocks is predicated on the notion of favorable legislative trends. Starting with the legalization of the drug for medical use back in the late 1990s, the last two decades has seen a steady move toward legalization via ballot initiatives.
The push for legalization of marijuana took a massive leap forward this year when the Vermont legislature legalized recreational use of marijuana, and the governor signed the bill into law. After all, if willing lawmakers could just pass a bill, the legalization process would move much faster than statewide ballot initiatives.
But not all recent policy news has been rosy.
In January, just as the Vermont House of Representatives was voting to legalize marijuana possession, Attorney General Jeff Sessions announced a federal crackdown that included the removal of long-standing federal protections that allowed states to set their own marijuana policies.
Fears of anti-marijuana policies out of the White House abated in June, as President Trump seemed to contradict this hardline stance by claiming he’d support legislation that allowed states to decriminalize pot. But after news this week of a rather harsh proposal that reportedly would prohibit Canadians who invest in marijuana stocks from even crossing the border into the U.S., some marijuana stocks have tumbled. However, some that were hit hard in Thursday’s after-hours trading had more than reversed those losses in Friday morning trade
Such price swings may rightly scare off low-risk investors. But for tactical traders who are happy to take on bigger risks in the pursuit of bigger rewards, this uncertainty could create big opportunities.
What are the marijuana stocks to watch?
Obviously, there are no blue-chip marijuana stocks. The industry is young, many pure-play cannabis companies are private and many that trade publicly are only available in the OTC market on thin volume.
So for the record: Remember that allows for bad players to dupe unwitting investors via penny stocks, “secret” tips and the typical shenanigans. Whether you’re interested in pot stocks or bitcoin or artificial intelligence, please make sure you don’t get sucked into a bad investment on hype alone.
The good news is there are a number of legitimate publicly traded cannabis-related stocks that provide investment opportunity if you’re up for it or can give you a sense of the industry if you’re just a curious onlooker.
An important big-picture investment to watch is the Horizons Marijuana Life Sciences Index ETF HMMJ, +2.74% , traded on the Toronto Stock Exchange and which boasts roughly $1 billion in total assets and holds about 40 related stocks. However, the fund’s website warns that “at no time may nonresidents of Canada be the beneficial owners of a majority of the Units of any one of our ETFs.”
Still, the ETF is worth closely watching as a gauge of the industry. The Horizons fund is up an impressive 140% in the last 12 months compared with just 16% or so for the S&P 500 SPX, +0.00% . And though the fund saw a serious decline from its January highs around $24 to recent lows around $14 in August, it has come roaring back and is up an impressive 50% in the last few days. It’s even up Friday morning, despite the report of new questions when crossing the U.S. border.
While this fund has dozens of components, it is heavily reliant on a few big names — Aurora Cannabis ACBFF, +1.80% Canopy Growth Corp. CGC, +5.72% and Aphria Inc. APHQF, +10.49% which collectively make up more than 40% of this marijuana ETF. Not only are these individual picks important to watch, they are also the most investible with market capitalization between $3 billion and $9 billion and all trading more than 1 million shares daily each. Aurora and Aphria are listed on the pink sheets, but Canopy Growth is an NYSE stock.
Long-term investors have cashed in on these three names in a big way, with five-year returns that are north of 1,000% for each. This year, however, it’s not quite as simple as just chasing a popular marijuana play; year-to-date, Aphria and Aurora are both down significantly.
Canopy has done better, with year-to-date returns of about 60% since Jan. 1. But it’s not alone. Just this week recently-minted marijuana play Tilray exploded higher on a deal to ship marijuana to Germany. That helped send the Nasdaq stock to a 400% gain in a few months since its July IPO.
What other stocks might profit?
This is clearly an event-driven space, and headlines like that are what traders are hoping for. After all, the vast majority of marijuana names — including Tilray — are still deeply unprofitable and simply offer the promise of growth.
But as with so many investment themes, there are tangential plays that investors may want to consider.
And just like you could play bitcoin by investing in chip maker Nvidia that made the chips used in the “mining” that produced the currency, you can also play production plays on marijuana stocks like Scotts Miracle-Gro Company SMG, -0.97% which acquired hydroponic operator Sunlight Supply in June.
Unfortunately, both Constellation Brands and Scotts Miracle-Gro stocks are in the red year-to-date and don’t quite offer the same sex appeal as direct plays on marijuana. But for those who want to just dip a toe into the pot industry, the names are worth following.