Bulletin
Investor Alert

Cannabis Watch Archives | Email alerts

Feb. 23, 2021, 11:49 a.m. EST

If you want to get rich with marijuana stocks, you need to know the crucial difference between U.S. and Canadian companies

new
Watchlist Relevance
LEARN MORE

Want to see how this story relates to your watchlist?

Just add items to create a watchlist now:

  • X
    AdvisorShares Pure Cannabis ETF (YOLO)
  • X
    AdvisorShares Pure US Cannabis ETF (MSOS)
  • X
    Constellation Brands Inc. Cl A (STZ)

or Cancel Already have a watchlist? Log In

By Philip van Doorn

The marijuana business is rightly described as a fledging industry. But what investors see as a potential promised land may be further off than many expect because full federal legalization may take a long time.

The unfolding legalization of marijuana in U.S. states makes this a complicated and potentially lucrative space for investors. Most marijuana ETFs are passively managed, meaning they track indexes.

The following discussion points to an advantage for active managers of exchange traded funds who can tailor strategies as the legal landscape changes.

Meanwhile, investors had better rethink their focus on Canadian cannabis companies, some of which may be cut out of a big piece of the industry action. The devil is in the details.

For broad coverage of the dynamic marijuana industry, see  Cannabis Watch

Marijuana has been legalized for recreational use in 15 U.S. states and Washington, D.C. However, it remains illegal on the federal level. This has led to a bizarre scenario.

The Canadian licensed producers (known as LPs) do not sell cannabis products in the U.S. because it is against U.S. law. But shares of the largest five are listed on the Nasdaq exchange or the New York Stock Exchange:

Don’t miss: To profit from planned merger of Tilray and Aphria, buy Aphria, says this analyst

Meanwhile, the four largest U.S. companies selling marijuana products in states (and Washington D.C.) where recreational use is legal aren’t listed on U.S. exchanges because they are engaged in activities that are technically illegal on the federal level. They are listed over the counter. These companies are known as multistate operators (MSOs):

In an August 2013 memorandum to U.S. attorneys, now known as the “ Cole Mem o,” James Cole, the deputy attorney general at that time, defined the Department of Justice’s position as relying on states that had legalized marijuana for recreational use to set up regulatory schemes to ensure compliance with eight DOJ goals listed on the first and second page of the document.

Since then, the federal government hasn’t attempted to arrest people within those states for purchasing small amounts of marijuana to use recreationally.

But under the Investment Company Act of 1940, mutual funds and exchange traded funds are still not allowed to own shares of the MSOs.

AdvisorShares has been able to work around this problem by purchasing MSO stock total return swaps in the AdvisorShares Pure Cannabis ETF /zigman2/quotes/211349815/composite YOLO +3.43% and the AdvisorShares Pure US Cannabis ETF /zigman2/quotes/220307682/composite MSOS +1.41% . The Securities and Exchange Commission required AdvisorShares to get an outside legal opinion about the total return swaps, which you can read on the AdvisorShares website. You should also read the prospectuses for YOLO and MSOS if you consider investing in them to learn more about their investment methodologies and risks, just as you should read the prospectus for any other mutual fund or ETF you consider.

Dan Ahrens, the portfolio manager for YOLO and MSOS, said during an interview Feb. 12 that he doesn’t expect the Canadian LPs to be able to sell marijuana in the U.S. for the “foreseeable future” because “neither the Democratic-controlled Congress nor President Biden ever called for full federal legalization of marijuana.”

This is where the arguments begin.

It’s easy for a politician to say he or she wants marijuana “decriminalized” for leisure use in small amounts. But that is not full legalization , which in addition to allowing leisure use of marijuana anywhere in the U.S., would allow banks to provide full services to U.S. marijuana producers and distributors, and allow their shares to be listed on public exchanges.

Full legalization would also presumably open up the U.S. market to the Canadian LPs.

So Ahrens expects state-by-state legalization to continue, with MSOs being the biggest beneficiaries. He believes the Canadian LPs are worth investing in as well, which is why YOLO holds shares of them. Canopy Growth Corp. is 38.6% owned by Constellation Brands Inc. /zigman2/quotes/207737284/composite STZ -0.29% , the brewer of Corona and Modelo beers, which has many other well-known consumer brands and holds warrants allowing it to take a majority stake in Canopy.

This gives Canopy deep pockets — the company has an agreement with Acreage Holdings Inc. /zigman2/quotes/221335077/composite ACRHF +0.74% , another U.S. MSO, through which Canopy would acquire Acreage Holdings in the event of “changes in U.S. federal law to permit the general cultivation, distribution and possession of marijuana or to remove the regulation of such activities from the federal laws of the United States.” That language comes from page 9 of Canopy’s 10k report for its fiscal year ended March 31, 2020.

MSOs have a bigger business already

Here’s a comparison of the past four quarters’ sales data for the five LPs and four MSOs. The companies’ fiscal quarters aren’t uniform, so the as-of date for the most recent reported quarter’s data that was available from FactSet on Feb. 18 is in the right-most column.

The most recent quarter is marked Q0, the previous quarter is Q-1, and so on. All data in all the tables is in millions of U.S. dollars.

First, the Canadian LPs:

/zigman2/quotes/211349815/composite
US : U.S.: NYSE Arca
$ 21.38
+0.71 +3.43%
Volume: 267,615
May 7, 2021 4:00p
loading...
/zigman2/quotes/220307682/composite
US : U.S.: NYSE Arca
$ 42.55
+0.59 +1.41%
Volume: 369,454
May 7, 2021 4:00p
loading...
/zigman2/quotes/207737284/composite
US : U.S.: NYSE
$ 240.92
-0.70 -0.29%
Volume: 632,450
May 7, 2021 4:03p
P/E Ratio
26.43
Dividend Yield
1.26%
Market Cap
$46.87 billion
Rev. per Employee
$926,183
loading...
/zigman2/quotes/221335077/composite
US : U.S.: OTC
$ 5.05
+0.04 +0.74%
Volume: 60,840
May 7, 2021 3:56p
P/E Ratio
N/A
Dividend Yield
N/A
Market Cap
$367.14 million
Rev. per Employee
$173,816
loading...
1 2
This Story has 0 Comments
Be the first to comment
More News In
Investing

Story Conversation

Commenting FAQs »

Partner Center

Link to MarketWatch's Slice.