If You Like Pot Stocks But Don’t Like Risk, Read This
With the rise of the legal cannabis industry, early investors in pot stocks are laughing all the way to the bank.
Consider Canopy Growth Corp (NYSE:CGC), which began trading on the TSX Venture Exchange in Canada in April 2014.
The company graduated to the Toronto Stock Exchange (TSE) in July 2016, and now also trades on the New York Stock Exchange (NYSE).
Investors who bought Canopy Growth Corp’s Canadian shares on their first day of trading paid around CA$2.60 per share. Since then, the stock has provided a total return of about 2,300%!
Then there’s Aurora Cannabis Inc (NYSE:ACB), another big-name pot stock that now trades on exchanges in both Canada and the United States. Over the past two years, the company has delivered a total return of over 470%.
And don’t forget Cronos Group Inc (NASDAQ:CRON), the first pot stock that got listed on the Nasdaq. In less than three months into 2019, Cronos stock has already shot up 88%.
The rally in these companies’ share prices was driven by the growth in their business.
For instance, in the December 2018 quarter, Canopy Growth grew its net revenue by 282% year-over-year while shipping 334% more cannabis than it did in the year-ago period. (Source: “Canopy Growth Corporation Reports Third Quarter Fiscal 2019 Financial Results: Gross Sales of $98M; Net Revenue hits record $83M,” Canopy Growth Corp, February 14, 2019.)
Stories like this keep weed stocks constantly in the news. Some analysts believe in the potential of the marijuana industry, while others think pot stocks are overhyped.
While I consider myself a long-term marijuana stock bull, I cannot deny the fact that marijuana stocks can experience some serious volatility from time to time.
In this day and age, it’s not uncommon to see a pot stock making a double-digit surge in one day, only to find itself tumbling by a greater magnitude in the following trading session.
In other words, if you want to bet on the hottest marijuana stocks, you should be prepared to deal with the potential big swings in their share prices.
The good news is, there is more than one way to invest in the cannabis industry. Chasing the most well-known marijuana producers is the most common one, and could turn out to be very rewarding.
However, if you are a risk-averse investor, the following three alternatives might be worth considering.
1. Invest in Real Estate for the Pot Industry
We know that pot producers are firing on all cylinders. But in order to grow and process cannabis, these companies need space. And if you happen to own properties that can be leased to these companies, you could make some serious money.
Of course, real estate is not cheap, and unless you have experience and connections in this field, it’s hard to get a big-name pot company to rent your land.
But you don’t have to worry about that, because there is a real estate investment trust (REIT) that specializes in these types of properties: Innovative Industrial Properties Inc (NYSE:IIPR).
Headquartered in San Diego, California, IIPR owns, manages, and acquires specialized industrial properties that are leased to experienced, state-licensed operators for their regulated medical-use cannabis facilities.
Innovative Industrial Properties Inc owns 13 properties totaling more than 1.1 million rentable square feet. They are located in Arizona, California, Colorado, Illinois, Maryland, Massachusetts, Michigan, Minnesota, New York, Ohio, and Pennsylvania.
The company boasts some solid operating metrics. As of March 13, 100% of the properties in its portfolio were leased with a weighted average remaining lease term of approximately 14.3 years. (Source: “Innovative Industrial Properties Reports Fourth Quarter and Full-Year 2018 Results,” Innovative Industrial Properties Inc, March 13, 2019.)
Therefore, IIPR is running a stable and recurring business. And because the company is publicly traded, you can become a part-owner of these regulated medical-use cannabis properties just by purchasing shares.
Don’t forget, as a REIT, Innovative Industrial Properties Inc is required by law to distribute most of its profits to shareholders through dividends. Right now, the company pays quarterly cash dividends of $0.45 per share.
In other words, you don’t have to rely on a soaring stock price to profit from this marijuana stock; the company pays shareholders cash every three months.
Still, IIPR stock has performed rather well recently. Year-to-date, it’s up more than 95%.
Innovative Industrial Properties Inc Stock Chart
Chart courtesy of StockCharts.com
2. Invest in a Marijuana ETF
Exchange-traded funds (ETFs) are nothing new. In fact, they’ve been around for over 25 years.
As the name suggests, these are investment funds that trade on stock exchanges, so it’s very convenient for investors to buy and sell them. But rather than just getting one stock, an investor gets exposure to a portfolio of assets when they buy an ETF.
In other words, ETFs help investors diversify.
And that’s the most obvious reason for considering ETFs. You don’t have to pick which stock to buy. An equity ETF usually tracks an index, which measures the performance of tens, if not hundreds of stocks.
Therefore, with just a few clicks of a mouse or a phone call to your broker, you can have a portfolio that mimics the return of an index.
Moreover, because an ETF can hold a large number of stocks, it allows investors to save on transaction costs. Think about it: if you want to have a portfolio that tracks the S&P 500 index through the full replication approach, you would need to buy 500 stocks (i.e., make 500 transactions).
Even if your broker charges as little as $5.00 per transaction, that’s still $2,500 just in brokerage fees. With an S&P 500 fund, on the other hand, you can achieve similar results by making one single transaction.
Obviously, ETFs still have a management fee, but it’s usually lower than what is charged at most mutual funds.
Plus, thanks to the booming cannabis industry and the increasing number of pot stocks trading on the market, there are even ETFs designed specifically for marijuana investors.
Horizons Marijuana Life Sciences Index ETF (OTCMKTS:HMLSF, TSE:HMMJ) is one of them. The fund tracks the performance of the North American Marijuana Index. While the ETF is listed on the TSE, U.S. investors can purchase it over the counter.
As of March 25, Horizons ETF held 58 stocks. It charges an annual management fee of 0.75% (plus applicable sales tax). (Source: “Horizons Marijuana Life Sciences Index ETF,” Horizons ETFs, last accessed March 21, 2019.)
With a marijuana ETF like this one, investors can get diversified exposure to the cannabis industry. Therefore, there’s less need to worry about company-specific news.
So far in 2019, this marijuana ETF has climbed 65.9%.
Horizons ETF Stock Chart
Chart courtesy of StockCharts.com
3. Invest in Non-Pure-Play Marijuana Stocks
Usually when we talk about pot stocks, we are referring to the pure plays, companies that only operate in the cannabis industry. But there are also non-pure-play marijuana stocks that can be suitable for risk-averse investors who are interested in this booming sector.
For instance, alcoholic beverage company Constellation Brands, Inc. (NYSE:STZ) invested $4.0 billion in Canopy Growth Corp last year. As mentioned earlier, Canopy Growth is one of the fastest-growing businesses in the pot industry and its stock has been soaring.
Thanks to this investment, Constellation Brands now has approximately a 37% stake in this hot marijuana company. (Source: “Constellation Brands’ $5 Billion CAD ($4 Billion USD) Investment in Canopy Growth Closes Following Shareholder and Canadian Government Approval,” Canopy Growth Corp, November 1, 2018.)
Therefore, if Canopy Growth continues its growth momentum, Constellation Brands investors also get a piece of the action.
And like I said, this is not a marijuana pure play. Other than its sizable stake in Canopy Growth, Constellation Brands also runs a massive alcoholic beverage business. The company markets beer, wine, and spirits—and is known for some of the most iconic brands, such as “Corona,” “SVEDKA,” “Pacifico,” and “Negra Modelo.”
Due to the strength of its core business, the company doesn’t necessarily need continued enthusiasm toward pot stocks to get investor attention.
According to its latest earnings report, Constellation Brands’ net sales grew nine percent year-over-year to $2.0 billion in the quarter ended November 30, 2018. Adjusted earnings came in at $2.37 per share, representing an 18% increase from the year-ago period. (Source: “Third Quarter Fiscal Year 2019 Results,” Constellation Brands, Inc., January 9, 2019.)
Constellation Brands, Inc. Stock Chart
Chart courtesy of StockCharts.com
Mind you, Constellation Brands is not the only non-pure-play marijuana stock for investors to think about.
Earlier this month, Altria Group Inc (NYSE:MO), the maker of “Marlboro” cigarettes, closed a CA$2.4-billion equity investment in Cronos Group Inc, another soaring weed stock. As a result, Altria now owns around 45% of Cronos. (Source: “Cronos Group Inc. Closes C$2.4 Billion Strategic Growth Investment from Altria Group, Inc.,” GlobeNewswire, March 8, 2019.)
Pot stocks had a strong start in 2019. And the industry is growing rapidly.
According to Grand View Research, Inc., the worldwide legal marijuana market is projected to reach $146.4 billion by the end of 2025, which would translate to a compound annual growth rate (CAGR) of 34.6%. (Source: “Legal Marijuana Market Worth $146.4 Billion by 2025,” Grand View Research, Inc., last accessed March 21, 2019.)
With growth rates faster than most other industries, cannabis companies have attracted a large audience. But with soaring share prices, pot stocks could see some corrections from time to time.
For the risk-averse investor, the above three alternatives—marijuana REITs, ETFs, and non-pure-plays—could provide a relatively safer way to get some exposure to this booming industry.