Financial advisors who have clients seeking to profit from the green gold rush may be unnerved by the volatility and rich valuations of cannabis stocks.
Although licensed cannabis producers have been in the spotlight, riding this emerging industry also is possible by taking a “pick-and-shovel” strategy – that is, owning companies that provide goods or services to the cannabis industry. This approach is reminiscent of the 1848 California Gold Rush, during which few prospectors struck it rich, but those who sold miners the tools and supplies made money.
Keep in mind that investing in these alternative weed plays doesn’t mean that some stocks, particularly smaller names, can’t have some wild swings too, but that may change as the industry matures. These kinds of companies can also offer diversification for investors who want to own a basket of cannabis names.
Globe Advisor asked three portfolio managers for some top “pick-and-shovel” plays.
Greg Taylor, chief investment officer and portfolio manager at Purpose Investments Inc., Toronto
The pick: MediPharm Labs Corp. (LABS-X)
52-week range: $0.91 to $6.52 a share
Shares of MediPharm, a licensed producer for cannabis oil production, will benefit from a growing demand for the product, which is used in drugs, beverages, edibles and topical creams, says Mr. Taylor. “The big future for cannabis is value-added products and away from smoking.”
MediPharm provides private-label oil in addition to doing contract processing. Some cannabis producers will outsource their oil extraction work while others combine in-house with external extraction. Barrie, Ont.-based MediPharm, which went public last fall, has done deals with firms such as Supreme Cannabis Co., Canopy Growth Corp., and TerrAscend Corp.
The big risk for MediPharm is that cannabis producers do all their extraction in-house, but that is unlikely, Mr. Taylor says. MediPharm’s stock moves with the cannabis sector, but that could change similar to how oil-services firms trade versus exploration-and-production companies, he says.
The pick: Canopy Rivers Inc. (RIV-X)
52-week range: $2.40 to $11.82 a share
Canopy Rivers, a private equity firm focused on the cannabis industry, is a less volatile way to play the sector, says Mr. Taylor. “It’s less risky than buying one company because it has multiple investments.”
The Toronto-based firm was spun off from Canopy Growth, which has a 27-per-cent stake, this past autumn. Bruce Linton is chairman and chief executive officer of both firms. Canopy Rivers will invest by way of convertible debt, royalty-stream deals and equity stakes.
Canopy Rivers’ portfolio includes firms such as Greenhouse Juice Co., a plant-based beverage maker planning to launch cannabidiol-infused beverages to Headset Inc., which offers business intelligence and analytics services to the cannabis industry.
Canopy Rivers’ shares plunged in late 2018 due largely to profit-taking by early investors who got in when it was private, but a lot of that is out of the way now, Mr. Taylor says.
Bruce Campbell, founder and portfolio manager, StoneCastle Investment Management Inc., Kelowna, B.C.
His funds: StoneCastle Cannabis Growth Fund; Cannabis Growth Opportunity Corp. (CGOC-CN)
The pick: KushCo Holdings Inc. (KSHB-OTC)
52-week range: US$3.76 to US$7.20 a share
KushCo is a truly “pick-and-shovel” play because it supplies products and services to cannabis growers, says Mr. Campbell.
Last year, the Garden Grove, Calif.-based company changed its name from Kush Bottles Inc. to reflect its diversification from its original focus on packaging, which included child-resistant offerings.
In addition to distributing vaporizer products, it now also sells hydrocarbon gases to the cannabis sector and has a design agency to provide custom-branding for cannabis brands.
Despite various business units, KushCo’s stock still moves with the cannabis sector, he notes. Competition from big packaging companies is a risk, but that won’t happen until marijuana becomes legal federally in the United States, he says.
KushCo, an over-the-counter stock, would benefit from listing on a major exchange; KuschCo could also be takeover target, he adds.
52-week range: US$31.10 to US$93.24 a share
This U.S.-listed real estate investment trust (REIT) is unique because it owns land and facilities leased to medical cannabis operators, says Mr. Campbell. Because shares of San Diego, Calif.-based Innovative Industrial Properties have rallied sharply, he is waiting for a pullback before buying the REIT.
Innovative Industrial Properties owns 13 properties in U.S. states where medical cannabis is legal. The company typically purchases property from cash-hungry cannabis producers and leases it back to them.
In addition to potential acquisitions, the REIT also would benefit from the legalization of marijuana federally in the United States or expanding into Canada, he adds.
The REIT recently raised its quarterly payout to US45¢ a share or US$1.80 annually. As this stock still trades with the volatility of the cannabis sector, that is a risk for income-oriented investors who want securities trading more steadily, he adds.
Dan Ahrens, chief operating officer and portfolio manager, AdvisorShares Investments LLC, Dallas, Tex.
The pick: Novartis AG (NVS-NYSE)
52-week range: US$72.30 to US$96.31 a share
This Switzerland-based drug giant’s recent deal with Tilray Inc. to develop and distribute medical cannabis products globally gives Novartis “some tremendous potential depending on the [industry’s] continued growth,” says Mr. Ahrens.
Nanaimo, B.C.-based Tilray, a licensed marijuana producer, will work with Novartis’s generic-drug unit, Sandoz AG, to sell non-smokable medical marijuana offerings, co-brand certain products and develop new ones.
The exclusive deal is key for Tilray because it’s a new and smaller company, while Novartis can offer the distribution muscle from being a profitable multinational with a diversified portfolio of medicines, he adds.
Shares of Novartis, whose drugs focus on cardiology, immunology and oncology, is exposed to the general volatility of the drug industry, but “it has a lot less risk than the typical cannabis business,” Mr. Ahrens says.
The pick: Turning Point Brands Inc. (TPB-NYSE)
52-week range: US$20.48 to US$50.07 a share
Turning Point Brands may not have the profile of the giant tobacco players, but will benefit from the emerging cannabis industry, says Mr. Ahrens.
The Louisville, Ky.-based company’s offerings include moist snuff, loose-leaf chewing tobacco, cigar tobacco and cigars. “It also happens to own Zig Zag rolling papers, which is obviously very cannabis-related,” he adds.
In recent years, the company has acquired several brands of vaporizers, “which people think in the future will be cannabis-related vapes,” he notes.
Formerly known as North Atlantic Holdings Co., the company went public in 2016. It recently acquired a 20-per-cent stake in U.S.-based Canadian American Standard Hemp Inc. which gives it access to extraction technology to harvest cannabinoids.
Because Turning Point Brands is still a smaller-cap stock, it can be a little more volatile than the overall market, Mr. Ahrens says.