Sorting Through the Haze of Weed Stocks

weedleaf

There is a huge amount of buzz surrounding marijuana stocks. I cannot think of a week in recent memory in which a client or prospective client didn’t call me or my partners with that question, “What do you think of marijuana stocks?” This month, I thought we’d finally tackle the idea in a short and sweet breakdown. What are the marijuana stocks? Are they any good? And what does the future hold?

The appeal of this play is quite obvious. Our clients and prospective investors are observant folk, and they see the world changing around them. Marijuana is facing a legalization Renaissance in the United States, and everyone is eager to cash in, to attach themselves to this momentum and let it carry them onwards and upwards.

The reality is far from that simple. Right out of the gate, this space is CROWDED. Aerogrow International, AbbVie Inc., AmeriCann Inc., Aurora Cannabis Inc., Agritek Holdings, Arcturus Growthstar Technologies, American Cannabis, Aphria Inc., Abattis Bioceutic, Axim Biotechnologies, the list goes on and on. That isn’t even an exhaustive list of all the companies that start with the letter ‘A’.

Turns out, it’s really hard to protect your business from competition when you’re in the business of selling plants and plant derivatives. Who could’ve known that?

Another huge problem with this “sector” is that they are well aware of the flood of inexperienced money coming in, and this has incentivized many to become “Pump and Dump” schemes. A Pump and Dump scheme is when you funnel your money into a worthless penny stock first, driving the price higher (due to such low volumes of trading on the stock), then show that positive chart to less experienced investors, creating a buzz. As this new money comes in it drives the price further up, creating more buzz, attracting more new inexperienced money. Then, after this hyperbolic growth (from say 15c a share to $4 a share) is complete, the original scam artist quickly (and quietly) sells his position. The whole charade collapses as investors cash out after stagnation sets in, and the last few people out are left holding the bag with huge losses. Think of it as a nefarious game of musical chairs.

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On top of the immense crowding for competition and scamming problems, we have the issue of segmentation. What is the focus of the marijuana company, medical or recreational cannabis? Do they focus on developing drugs, or on opening mom-and-pop style dispensaries? Which states are they operating in? Are the laws there subject to change? When? Will they be trying to expand to other states? What is their corporate model and strategy?

From my experience, many of these companies either don’t know the answers to these questions or simply don’t care. If the “McDonald’s of Marijuana” is going to evolve, we’re far from it. The recreational marijuana companies need to establish reputations for consistency and excellence, develop brand awareness and loyalty, and to perfect a business model that is easily replicatable by franchisees, just as McDonald’s did. In the absence of that, they are doomed to be stuck as minnows in a bucket all clamouring for the same market share.

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There are interesting developments on the horizon. The first ever legal marijuana ETF has hit the market, Medical Marijuana Life Sciences (HMMJ). The new ETF replicates the performance of the North American Medical Marijuana Index, and is designed to give exposure to a basket of North American publicly traded companies with “significant business activities” in the marijuana industry.

Will this be a good position to hold near term? Probably not by my estimation, if the past is any indication, and especially considering the opportunity costs associated with tying money into a wonky new ETF while markets have been rallying broadly. It does hit at one positive sign: the marijuana market is growing up.

- Kiernan Easton, Private Wealth Manager and Partner at Dynamic Wealth Solutions LLC (Kiernan@GoDWS.com)

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