Lots of uncertainty around marijuana, but the profit potential looks very attractive. Investors unsure of individual stocks may want to take a look at this ETF.
Horizons Marijuana Life Sciences ETF (HMMJ.TO)
From Internet Wealth Builder
Recreational use of marijuana will be legal across Canada in July, and Ottawa and the provinces are gearing up to handle what is expected to become a multi-billion-dollar business.
The industry has tremendous growth potential. But there are also some unresolved issues that investors must consider before committing their hard-earned cash.
One is the fragmented state of the industry. At this stage, it’s somewhat like the dot.com start-ups of the 1990s. Many companies want a piece of the action, but no one can predict with certainty which ones will survive and prosper and which will go belly-up.
We also need to consider the regulatory environment. The provinces are racing against the clock to formulate the rules, establish pricing, and set up the distribution systems for pot sales within their jurisdiction. Except for some broad outlines, we don’t know what form these will take or what impact they will have on the marijuana producers.
Then there is the U.S. to consider. Recreational cannabis is not legal in most U.S. states and the federal government has served notice it will start cracking down on illegal sales. The point man is Attorney-General Jeff Sessions, who according to The Washington Post is almost obsessed with eradicating weed. (He once said that he changed his views on the Ku Klux Klan when he found they smoked pot, Supposedly, he was joking.) Sessions announced earlier this month that he has rescinded an Obama-era directive not to prioritize the prosecution of dispensaries in states that have legalized the drug.
No one is sure how that directive will translate into action and the challenge to states’ rights it implies may mean it all ends up before the U.S. Supreme Court. But it creates a lot of uncertainty for Canadian producers who sell their product into the U.S. in violation of federal laws. There have even been warnings that those companies might be delisted from the Toronto Stock Exchange.
Given all these question marks, we have been reluctant to recommend any marijuana stocks to our readers.
Clearly, this is a business with great but unknown potential. But it’s in its infancy and the recent stock price performance is a good indication that investors are unsure how to properly value these companies at this point.
If you want to invest in this sector, I suggest your best option is an exchange-traded fund that gives you exposure to a range of companies. A logical candidate is the new Horizons Marijuana Life Sciences Index ETF (HMMJ.TO), which was launched last April and has already attracted almost $710 million in assets.
It tracks the North American Marijuana Index, which includes publicly-traded companies from across the continent with an emphasis on Canada. In fact, Canopy, Aurora, and Aphria together comprise just over 40% of the portfolio.
As a result, it should not be surprising that the fund’s performance reflects the same pattern we have seen in the individual stocks. It was issued at $10 per unit, dropped to a low of $8.21 in June, and then took off to reach a high of $25.56 on Jan. 9. Since then it has lost $5.66 per share (22%), closing on Friday at $19.90 after dropping $2.15 on the day (Wall Street’s Best Investments editor: it’s trading at $22.79 as I write this). Perhaps that’s a bargain, or it could be a falling knife, as investors wake up to the many unresolved issues in the sector.
I will add this ETF to our Recommended List with the caution that it is highly volatile and not suited to conservative investors. The management fee is on the high side at 0.75%.
Action now: HMMJ is a Buy for aggressive investors who are prepared to live with the risk of what may, or may not, be a new Gold Rush.
Gordon Pape, Internet Wealth Builder, www.buildingwealth.ca, 1-888-287-8229, January 14, 2018