Legalized pot is coming to Canada, how can I cash-in?
Lately, I've had quite a few people ask me for my thoughts on the new Horizons Cannabis ETF, HMMJ.
Although it's common knowledge that I am a big ETF supporter and investor, people want to know if I'm buying into Canada’s hottest new pot ETF. The short answer is No, but seeing as I'm not a registered financial advisor I'm going to let the pros tell you why.
Special thanks to Garth, Doug, and Ryan over at Turner Investments for putting together this fantastic breakdown and insight into HMMJ. To learn more about Garth and the team please visit TurnerInvestments.ca. I've included their latest article below:
There’s old baseball wisdom that suggests hitters shouldn’t chase the high heat (fastballs out of the strike zone) or they’ll get burned, that is, strike out. There’s similar wisdom in the exchange-traded fund (ETF) universe: Chasing the hottest new product launches usually leads to a figurative strike-out as well.
The latest form of ‘high’ heat hit the ETF market last month: The new Horizons Medical Marijuana Life Sciences ETF (MMJ). Over the past few months, we’ve had no shortage of clients wondering if we were going to add this product to their portfolios mainly because marijuana-industry stories have been in the news endlessly over the past year. We didn’t buy it, and we alluded as to why in a recent Greater Fool blog post:
The ETF market is becoming very…what’s the word? Granular. Investors must be honest and ask themselves if they truly understand the highly specific areas that they’re investing in. Keep this in mind as you eagerly await the first medical marijuana ETF (it’s coming; Horizons just filed its prospectus).
Timing of new ETF issuance is not always advantageous for investors. ETF providers are in the business of sales. Fair enough, but just as a company typically only launches an IPO when its industry is red hot (read: expensive), so too do ETF providers with their product launches.
Now, we weren’t just highlighting the danger of new ETF launches because it was intuitively true—there’s also data and research to back it up.
Momentum Doesn’t Last Forever
For good or bad, past performance sells in the investment industry. Unfortunately, past performance often doesn’t last.
In 2012, Vanguard conducted an exhaustive study of new ETF launches because it was concerned by the “dizzying array” of new products coming to market. Of course, since 2012, the number of product releases (and ETF providers) has only continued to rise. The telling conclusions of the 2012 study are very likely still true today:
…we find that ETFs are most likely to be created with indexes that have performed well relative to the broad U.S. stock market before the inception date, but that such performance, on average, does not persist. Even so, new ETFs that use indexes with back-filled data appear to have more success in attracting assets, suggesting that the availability of hypothetical performance data may contribute to the viability of a new ETF.
Hypothetical Growth of $1 Before And After Index-Live Date (i.e., New ETF Launch)—ETF Providers Marketed The Returns To The Left Of Dotted Line, Investors Actually Received The Returns To The Right
Certainly the performance of the Horizons Medical Marijuana Life Sciences ETF has done nothing to contradict Vanguard’s conclusions—HMMJ has badly underperformed since its launch, and Canopy Growth and Aurora Cannabis, two of the world’s largest medical marijuana companies and a combined 20% of HMMJ, were up a mindboggling 290% and 448%, respectively, a year prior to the ETF launch.
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So then, what's the best way to cash in on pot?
As you can see, the hot new pot ETF (although tempting) might not look so hot a year or two down the road. However, this doesn't mean we can't still invest in this fast-paced and growing industry.
In my latest guide, Building a Bulletproof Portfolio, I describe how I built a portfolio that sailed through the 2008 crash without losing a dime. Although I believe predominantly in ETF-based portfolio's for their increased diversification, stability, and liquidity, I do have a small portion of the portfolio dedicated to "alternative strategies".
Alternative strategies may include investments such as individual stocks, bitcoin or digital currency, and private equity. It's within this alternative strategies section where I hold my piece of the pot pie in the form an individual stock called ICC.
Here's how ICC describes itself:
International Cannabis Corp. (ICC) is the first licensed integrated cannabis corporation in South America – producing, researching and marketing cannabis for medical and recreational uses, and hemp-based products.
Why I like ICC
As always, I encourage you to perform your own due diligence before investing. Here are some of the reasons why I like ICC over any of the Canadian cannabis stocks:
ICC trades on the Canadian Venture Exchange and has an office in Vancouver.
Marijuana is already legalized for recreational use in ICC's home country of Uruguay.
ICC is one of only two companies in South America legally licensed to grow and sell marijuana for both medicinal and recreational use.
ICC is South America's largest licensed producer of cannabis.
Numerous other countries in South America are currently working on legalization plans, including Brazil, Chile and Peru.
Thanks to the warmer climate ICC's production costs are a fraction of North American producers (i.e. $0.60/gram vs. $2.00 to $3.00/gram), giving them a major advantage in future price wars. Think about it, not having to heat a greenhouse throughout the Canadian winter saves a lot of money!
Recreational cannabis is a mere fraction of their overall sales, with a large portion of distribution coming from cannabis extracts for medicinal use - high margins.
If you're considering a marijuana stock that captures the strong potential of the ever-growing pot industry I encourage you to take a good look at ICC. Stock prices for the various Canadian producers have been so volatile over the past year and we still haven't even legalized the stuff!
Personally, I believe ICC is way ahead of the game with legalization, sales and global distribution channels already in place. Why wait for Canadian legalization when you can invest in an already-established giant?
Are you investing in legalized marijuana? If so, tell me how in the comments below!
Disclaimer: The views expressed is provided as a general source of information only and should not be considered to be personal investment advice or solicitation to buy or sell securities. Investors considering any investment should consult with their investment advisor to ensure that it is suitable for the investor’s circumstances and risk tolerance before making any investment decisions.
Before you invest be sure to download your free copy of Building a Bulletproof Portfolio, the complete guide on how I built a winning portfolio that sailed through the 2008 stock market crash without losing a dime.