“Don’t look for the needle in the haystack. Just buy the haystack!” — John Bogle
Today, I begin a new series focusing on the cannabis industry, answering your questions along with identifying the major funds, and then top stocks for next week. I will only be answering market questions on this topic and will not be getting into or responding to questions on ethics.
Since states began making cannabis legal, there has been a euphoria to invest in this sector. One key point, cannabis is illegal on the federal level. As I type, it is legal in 11 states for recreational use and legal in 33 states for medicinal use. In the next couple of years, other large population states will have it on their ballots and will cause an even greater demand — hence the reason for many to jump in and buy funds and stocks in this sector.
There is not a person with an email that has not received numerous messages promoting cannabis stocks, that they were the hottest stocks to buy for at least the last three years — their words, not mine. So Question 1: How profitable have cannabis stocks really been?
To answer the first question, I used my personal analytics and researched for the largest cannabis funds and trusts by (AUM-assets under management) tracking these indexes. After identifying the largest, I charted their performance (since the beginning of the current bull run from January 2017 to date), using these funds: ETFMG Alternative Harvest ETF (MJ-blue line), Advisor Shares Pure Cannabis ETF (YOLO-red line), The Cannabis ETF (THCX-green line), Cambria Cannabis ETF (TOKE-purple-line), and the Amplify Seymour Cannabis ETF (CNBS-orange line).
The (macro) returns are as follows; ETFMG Alternative Harvest ETF (MJ-down 16%), Advisor Shares Pure Cannabis ETF (YOLO-down 46%), The Cannabis ETF (THCX-down 38%), Cambria Cannabis ETF (TOKE-down 34%), and the Amplify Seymour Cannabis ETF (CNBS-down 40%). During the same time period the market ($SPX) is up 48% in the green shaded area.
Let’s now audit the (micro) performance results (in order of AUM) of the same group from Jan. 1, 2019, to date. ETFMG Alternative Harvest ETF (MJ-down 29%), Advisor Shares Pure Cannabis ETF (YOLO-down 46%), The Cannabis ETF (THCX-down 38%), Cambria Cannabis ETF (TOKE-down 34%), and the Amplify Seymour Cannabis ETF (CNBS-down 440%). During the same time period the market ($SPX) is up 31% in the green shaded area.
To answer the second question, in the long-term (macro), all of these cannabis funds underperformed the general market by 30% and more. One fund, MJ had a good run in the first quarter of 2019, but dove in March and continued to drop along with the other funds into the end of the year. Currently, money has started to flow back into these funds. It will be interesting to see if this continues.
Per the third question, what companies are in these funds? Two funds, YOLO and CNBS are actively managed, meaning the fund manager selects what they think are the best companies, while the rest of the funds simply track indexes in this space.
Do these results mean all cannabis funds underperformed the market? The answer: Absolutely not. Per these cannabis securities, you asked and I answered, but not without hesitation. Why? These funds own companies that operate in a sector although legal in many states are still illegal per federal law.
It is obvious many investors flocked into this sector with anticipation of huge profits. If they had used a proven system, maybe they would have made a different decision. This helps to prove that one shouldn’t just buy what they think. Consider buying what you see and only in areas or sectors that are or soon will be profitable.
Also, it is a good rule of thumb not to buy into sectors that are illegal federally. One key component to price appreciation is accumulation by institutional buying. When and if it is legal federally to own these companies then look for increased buying from the institutions.
For those asking about previous columns, go to thesouthern.com, type eye on the market in the search bar. To see chart details, go to the online version.
What’s next? I look under the hood of the largest cannabis fund MJ by assets under management to see which companies make up the fund. I will track their performance to see if there are any hidden gems, performance wise to help keep your hard earned money from going up in smoke!
After that, I examine (legal) cannabis related companies to see if they could be potential trading/investing candidates.
In the following weeks, I’ll identify the best and worst ETF and funds/stocks from 2019 then instruct how to use my very popular Simple Simon trading system. I promised and will deliver.
Plan your work, work your plan, and share your harvest!
Full Disclosure: the author does not own any securities in this column.