February 15, 2021 BARRON’S 9
STREETWISE
Canada may have gotten a head start in legalizing
marijuana, but the grass opportunityis now
greener on the other side of the border.
Hot Money Has Lit Up
Pot Stocks. Wait for
The Smoke to Clear.
“G
ot high
on weed
stonks
and
forgot to
sell the
top,”
wrote one of the asset allocators at
WallStreetBets on Thursday evening.
A screenshot of a Robinhood account
showed just over $500,000 turning
into $203,000 in a day. On the Reddit
day-trading forum, this is known as
posting loss porn, and it’s part of the
social experience.
This particular exhibitionist “still
made money cause i was in early”—
which seems plausible, considering
the highs reached by cannabis shares
just before the smoke out.
Canopy Growth(ticker: CGC), an
industry blue chip, ended Thursday
down 22% for the day, but up 135%
over six months.Tilray(TLRY), an-
other biggie, was down 50% and yet
up 366% for the same period.
You would think Dan Ahrens
would be loving this. He picks pot
stocks forthe $469millionAdvisor-
Shares Pure Cannabisexchange-
traded fund (YOLO), which is up
148% in a year. In September, his firm
launched a domestic sibling,Advisor-
Shares Pure US Cannabis(MSOS),
with just $2.5 million. It’s now up to
nearly $1 billion. The funds charge
0.75% and 0.74%, respectively.
The trouble is, cannabis hot money
is making a hash of fundamental anal-
ysis. Last year, Ahrens bet that com-
panies with solid cash flows, or at
least healthy growth prospects and
balance sheets, would rise above the
rest. He also heavily favored the U.S.,
which is years behind Canada on le-
galization, but which Ahrens de-
scribes as offering a cannabis oppor-
tunity akin to investing in alcohol just
after the fall of prohibition nearly a
century ago.
Those bets paid off, with the older
AdvisorShares fund returning 47% in
2020, even thoughETFMG Alterna-
tive Harvest(MJ), a $2 billion index
fund, lost 11%. Stock-picking is better
than indexing when it comes to canna-
bis, Ahrens says. But so far this year,
Ahrens is up only 58%, putting him 16
points behind the index fund.
“Companies with the worst finan-
cials—some of the companies that had
been down the most in the last couple
of years—are maybe trading up the
most right now on hype, on Reddit, on
chat rooms, on WallStreetBets, and
even short squeezes,” Ahrens says. He
has seen this before, although not as
extreme, when Canada legalized mari-
juana use in 2018, and shares popped.
“And then when actual results started
coming in a year later, everything re-
ally crashed and burned, because
those prices were based on hype.”
Canada’s head start on OK’ing pot
helps explain why the best-known
names, like Canopy and Tilray, are
based there, and why even U.S. play-
ers have their main stock listings in
Canada, and trade over-the-counter at
home. Yet the grass opportunity is
suddenly greener south of the border.
Colorado topped $2 billion in mari-
juana sales through state dispensaries
last year, putting it on par with Can-
ada, and raising $387 million in taxes
and fees. In New Jersey, a state that
doesn’t allow residents to pump their
own gas, voters approved a constitu-
tional amendment to legalize recre-
ational pot—presumably, residents
will be permitted to roll their own
joints. Arizona, which turned blue
this past election, voted to light up,
too. Sure, those liberals and their
reefer views—butthen, how to explain
red Montana and South Dakota giving
the thumbs-up, too?
Virginia legalization appears immi-
nent, which will bring the number of
recreational pot states to 16. New York
could be next—I’m a quarter-century
out of practice, and hoping I can find
my hacky sack and Dave Matthews
Band CDs in time.
Just as lucrative as state by state
approval would be a new federal
framework. The SAFE Banking Act,
stalled for two years but perhaps in
play this year, would open ordinary
financial services to pot companies.
Policy makers might also revisit Sec-
tion 280E of the tax code, which pre-
vents cannabis operators from taking
certain common tax deductions,
crimping profitability.
Deal-making is heating up. Earlier
this month,Jazz Pharmaceuticals
(JAZZ) said it would buyGW Phar-
maceuticals(GWPH), which makes
medicine from cannabis, for $7.2 bil-
lion in cash and stock—the biggest pot
deal to date. The 323-year-old London
Stock Exchange has approved its first
cannabis listing. In the U.S., mean-
while, cannabis players can’t yet cross
state lines, which means many are
vertically integrated, from farms to
dispensaries, and not yet as efficient
as they could be.
For investors who wish to partake,
Ahrens recommends what he calls the
four horsemen of the U.S. industry.
All have shot higher of late.Curaleaf
Holdings(CURLF), valued at $11 bil-
lion, has the biggest footprint. Free
cash flow is seen tripling next year, to
nearly $300 million. Ahrens likes that
the company has hired executives
from the consumer-goods industry.
Trulieve Cannabis(TCNNF), at $5.
billion, is Florida’s weed leader. Its
free cash flow is projected to more
than double next year, to $163 million,
and then rise another 77% in 2023.
Green Thumb Industries(GTBIF),
valued at $8.4 billion, andCresco
Labs(CRLBF), at $5.4 billion, are
Midwest operators that could do $
million and $170 million in free cash
next year, respectively.
There is more to pot investing than
growers. Among the top holdings in
AdvisorShares Pure Cannabis isIn-
novative Industrial Properties
(IIPR), a real-estate investment trust.
It buys cannabis property and leases it
back to the sellers, replenishing in-
dustry capital, and supplying income
investors with dividends. Shares yield
2.4%. Counting price gains, they have
returned nearly 800% cumulatively
over the past three years.
Kindly don’t read this note on the
pot-stock hubbub as a call to go all-in,
or even, if you’re not already so in-
clined, to dabble. Personally, I’m not
much of a theme investor, unless
plunking savings in cheap, broad
stock funds counts as a theme. I’m
hoping to avoid producing loss porn.
Tasteful ledger shots exposing skimpy
overhead, I’m willing to consider.B
email: [email protected]
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