Cannabis Corner: Widen Your Horizons

Hilary Kramer

Hilary Kramer is an investment analyst and portfolio manager with 30 years of experience on Wall Street.

Believe it or not, a well-constructed cannabis portfolio is now beating the S&P 500. You just need to look past the established cultivators that got too far ahead of themselves and will need years to recover.

I track eight significant cannabis stocks. On average, the group has surged a healthy 11% YTD while the broad market has erased all the progress made over the last 10 months.

But averages can be misleading. All of the group’s net gains come entirely from two names that only found a place on Wall Street’s radar over the summer. 

Green Thumb Industries Inc. (OTC:GTBIF) was under $10 when this wild year began. Now, it’s gearing up for its next test above $16. 

And GrowGeneration Corp. (NASDAQ:GRWG) has quadrupled in value over the same period. If you were in either of these stocks, you’re probably having a great year.

Unfortunately, most cannabis investors are not feeling so great. Factor out GTBIF and GRWG and the other stocks on my industry screen are down anywhere from 11% to 84% so far in 2020.

I’m talking about the big cultivators like Canopy Growth Corp. (NYSE:CGC), Tilray Corp. (NASDAQ:TLRY) and Aurora Cannabis Inc. (NYSE:ACB) that are featured in exchange-traded funds and other size-weighted portfolios.

These stocks are much more widely held. They’re swollen with money from speculators who couldn’t figure out any other way to get exposure to what still looks like a deregulation boom.

Their commodity-driven business models just don’t work. But GTBIF is something new, selling value-added cannabis products at higher price points. 

And GRWG sells hydroponic gardening supplies to entrepreneurs looking to cash in on the green gold rush. No matter who grows the crop, this company participates in the buzz.

Revenue doubled this year. And at this scale, GRWG is already profitable. The big farmers can’t say that.

The moral here is simple. While any new business category will initially look like an entrepreneurial free-for-all, ultimately only a few winners will be left standing.

Even with vast venture capital backing, most untested business models will still fail. You want to make sure your portfolio has enough space for the winners that you can weather the failures.

Then, when the competitive smoke clears, you’re not looking at a total loss. I use a variant of this system for my IPO Edge subscribers. I urge you to take a look.

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