What to Know Before Investing in the ETFMG Cannabis ETF

As long as marijuana stocks continue to be driven by hype and publicity, investors in the MJ ETF should be ready for more volatility

In 2019, marijuana stocks have been on a roller coaster ride. Until mid-March, cannabis investors enjoyed an uptrend.  And many marijuana stocks have surged 100%+ in just a few weeks.

The Only 4 Pot Stocks Worth Considering Long Term
Source: Shutterstock

But since April, many of them have lost considerable value, driven by the sector’s general weakness and poor earnings results.

Investors are now wondering which marijuana stocks to buy and hold for the-long term. If you are interested in buying marijuana shares, you may also want to take a closer look at the ETFMG Alternative Harvest ETF (NYSEARCA:MJ). The MJ ETF is a marijuana ETF that has about $1 billion of assets under management.

Long-term investors should have realistic expectations about the cannabis market. They should also be ready for large daily stock  price fluctuations.

The marijuana stocks that make up the majority of the MJ ETF also tend to be very volatile around the time when their quarterly earnings are announced. Given the risk posed by the cannabis sector, no cannabis-oriented ETF  is going to be completely safe.  But MJ’s diversification makes it safer than many alternatives.

Cannabis Companies in the MJ ETF

The MJ ETF currently holds 38 stocks.  About 70% of its assets are allocated to pot companies and growers. Many of the companies whose stock it owns are based in Canada.

Among the major stocks in the MJ ETF are Aurora Cannabis (NYSE:ACB), Cronos Group (NASDAQ:CRON), Canopy Growth (NYSE:CGC), Tilray (NASDAQ:TLRY) and Green Organic Dutchman Holdings (OTCMKTS:TGODF). It also owns the shares of some tobacco stocks and fertilizer companies.

A recent study by Lake Land College has concluded that Canadian “[c]annabis stocks on average possess higher level of risk when compared with growth and speculative stocks on the TSX.”

With the recent decline in the the price of individual marijuana stocks, many of them have come down to more attractive levels.

But one fundamental point that investors need to keep in mind is that most  cannabis producers are not profitable yet. Analysts value cannabis companies mostly based on their belief that these companies will be profitable in the future.

But I’d bet that several marijuana stocks may not be around in several years because some of them have negative cash flows, poor business models, and intense competition.

The MJ ETF can avoid some of the bad marijuana stocks. But the ETF will have difficulty outperforming several of its large holdings, such as Cronos Group, Aurora Cannabis and Canopy Growth. Nonetheless, the  diversification of the MJ ETF  limits its volatility and declines while retaining  exposure to the potential gains of the cannabis market.

Two Other Stocks to Note in the MJ ETF

A wide range of products are made from cannabis, including CBD oils, edibles, cannabis-infused beverages, and concentrates used in vaping, creams, and lotions. Thus the industry includes companies that  make, market, and distributing these products and their components.

I’d like to highlight one stock, GW Pharmaceuticals (NASDAQ:GWPH), in the MJ ETF that is quite different than the other marijuana stocks. GW is MJ’s largest holding, accounting for 7.91% of its assets.

A 2018 report by the United Nations revealed that Britain is the biggest producer and exporter of legal cannabis in the world. In 2016, the UK produced 95 tonnes of marijuana and exported 2.1 tons.

Virtually all of the U.K.’s cannabis exports are contained in one drug, Sativex, which is produced by UK-based GW Pharmaceuticals, a leading cannabinoid-focused biotech company.

GW’s Sativex is used to treat spasms in multiple sclerosis patients. Last year the company obtained U.S. regulatory approval of its CBD drug, Epidiolex, for the treatment of epilepsy.

GW stock has gone from about $10 in 2013 to an all-time high of $196 in May 2019. Currently it is hovering around $110.

MJ also owns shares of the companies that provide ancillary products and services to the cannabis companies.  One such name is Scotts Miracle-Gro (NYSE:SMG), which is known for its fertilizer products.

Where Is the MJ ETF Price Now?

In the past two years, marijuana stocks have been choppy and highly speculative. Their valuations can and do change suddenly and drastically, both as a result of company news and developments in the industry.

For most of 2019, cannabis stocks have struggled. And MJ   ETF reflects their weakness.

In 2019, the MJ ETF is down over 20%. After reaching an intraday low of $23.3 on Dec. 24, 2018, it rallied to a high of $39.25 on March 19. Its 52-week high remains at $44.29, reached on Oct. 16, 2018. Currently it is hovering around $18.70.

Those investors who pay attention to  charts should note that, due to the decline of its price since late March, MJ ETF has a not-so-pretty technical picture. In the long run, MJ needs to build a base again before a long-term, sustained rally  can occur.

MJ stock probably won’t surpass the high it reached on March 19, 2019 in the near-term.

And MJ  may reach a new 52-week low,possibly around $18, very soon. In the coming weeks, I expect MJ to mostly trade between $22.5 and $17.5.

However, in case of a broader market selloff,  the fund could easily near $15.

The Bottom Line on the MJ ETF

MJ ETF offers exposure to Canadian cannabis producers and a number of biotech firms. Therefore, it may be appropriate for some long-term investors who are interested in the cannabis sector.

It is important to note that unless the U.S. federal government legalizes marijuana, the worldwide cannabis market consists, for the most part, of Canada. And  most of these cannabis companies cannot become profitable from the limited Canadian market alone. As a result, the high valuations of some marijuana stock are quite difficult to justify.

Most Canada-based cannabis companies have high operating expenses. The continuous red ink at the bottom of their income statements is a major worry for the shareholders. If the international cannabis market does not grow as expected, then MJ ETF could drop further.

Investors who buy MJ ETF in the near-term should hold the ETF for several years.

As of this writing, Tezcan Gecgil did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2019/10/what-to-know-before-investing-in-the-etfmg-cannabis-etf/.

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