There’s certain basic principles they teach you at business school in exchange for that six-figure price tag. The number one goal for any business is to survive. Mergers and acquisitions (M&A) generally don’t add value. And economies of scale are what help larger companies steamroll their competition. Large companies generally mean lower volatility which translates to lower risk. It’s one of the reasons we don’t invest in companies with a market cap of less than one billion dollars.
Another thing you’ll learn is the notion of arbitrage. Trading desks often trade the uncertainty around M&A events because sometimes things fall through. That’s why we’ve always been puzzled as to why special purpose acquisition companies (SPACs) that announce an intent to merge suddenly start appreciating well into the triple digits. The deal hasn’t even gone through, yet everyone acts as if it has. We usually like to wait for the ink to dry before taking a look at any M&A events, but today we’re going to make an exception. That’s because we’d like to take a closer look at what may soon be the biggest marijuana company in the world by revenues.
The Best Marijuana Stocks
We’ve recently written about how the new administration views cannabis in a favorable light – as well they should when you compare it to how many lives alcohol has ruined – so the outlook for marijuana to be legalized at a federal level is favorable. This translates in an uptick of interest from investors who are now considering the investment theme especially since the dust has settled from all the initial hype. In order to find the best marijuana stocks, we might first start with the biggest marijuana stocks. We can measure this in a number of ways, but when it comes down to it, there’s only one metric that really matters – revenues.
To find the biggest marijuana stocks out there, we can turn to the ETF providers whose job it is to provide investors with exposure to the biggest and best cannabis stocks. Since the last time we looked at cannabis ETFs there’s a new name in town – the AdvisorShares Pure US Cannabis ETF (MSOS) – and it’s managed to attract a billion dollars in assets under management (AUM) already. Here are the top-10 assets in the ETF right now along with their revenues (trailing 12 months from Yahoo Finance):
|Company Name||Ticker||Weighting||Market Cap
|Revenues (TTM millions)|
|GREEN THUMB INDUSTRIES||GTBIF||10.10%||7.5||455|
|CURALEAF HOLDINGS INC||CURLF||9.49%||11||472|
|CRESCO LABS INC||CRLBF||8.51%||3.3||355|
|RECV AYR STRATEGIES INC||AYRWF||6.24%||0.684||139|
|INNOVATIVE INDUSTRIAL PROPER||IIPR||5.00%||5||44|
|COLUMBIA CARE INC||CCHWF||3.71%||1.8||126|
Many of these names look familiar becasue we covered them in our 2019 piece on The Biggest Cannabis “Multi-State Operator” Stocks. That’s what this ETF claims to be targeting – multi state operator stocks (MSOS). The three biggest names on the list by market cap and revenues – Green Thumb, Trulieve, and Curaleaf – are the very same names we covered in our June 2020 piece on Three Billion-Dollar U.S. Cannabis Stocks. Curaleaf remains The Biggest Cannabis Company in the United States by revenues and market cap. If we were to invest in United States cannabis as a theme, we’d put our chips on these three stocks, but we’d be missing out on what’s north of the border.
The biggest ETF right now by AUM is the ETFMG Alternative Harvest ETF (MJ) with nearly $2 billion under management. The top-10 constituents contain the large Canadian growers like Tilray and Aphria, two companies that are planning to merge soon.
|Company Name||Ticker||Weighting||Market Cap (billions)||Revenues
|TILRAY INC-CL 2||TLRY||7.48%||4.3||210|
|CANOPY GROWTH CO||CGC||6.02%||13.7||506|
|CRONOS GROUP INC||CRON||5.56%||4.16||37|
|VILLAGE FARMS IN||VFF||3.89%||1.27||156|
|VECTOR GROUP LTD||VGR||3.41%||2.12||1450|
There are a few exceptions in the above list of mostly Canadian growers. The first is GW Pharmaceuticals which is a British pharmaceutical company looking to create therapeutic from the devil’s lettuce. The second is Vector Group which is involved in tobacco and real estate and looking to enter the marijuana market.
The Best Marijuana Stocks
People inevitably want to know the best stock to invest in for any given theme. In the world of disruptive technology stocks, that’s a pretty simple exercise because there aren’t a lot of choices. In the world of cannabis, you have two countries to consider which are at varying levels of maturity – the United States and Canada. As the industry continues to see more consolidation, we’d be prone to stick with the largest stocks out there in both jurisdictions. For the MSOS lot, that would be Green Thumb Industries, Trulieve, and Curaleaf. Buy equal amounts in all three stocks using dollar-cost-averaging. You now have cannabis in the United States covered.
North of the border, you’re dealing with a mature market where cannabis is legal across the board. The opportunity here is to invest in a company that will dominate the market using economies of scale. Let’s assume that the Tilray/Aphria merger goes through as planned. We would then have the largest marijuana company in the world by revenues. (As measured by market cap, Tilray/Aphria would be the second largest next to Canopy Growth.) Because Canada’s market is more mature, you could just buy Tilray/Aphria and bet on the fact that they’ll continue to grow organically and via acquisition as the industry looks to consolidate.
For a lower risk approach, you could invest in what experts have dubbed the ancillary cannabis sector. These are non-plant-touching companies that stand to benefit from the growth of cannabis without any of the legal risks names like Scotts Miracle-Gro or Hydrofarm. It’s also a way to incidentally play the indoor growing theme which has been hot as a greenhouse lately.
In our article on The Puzzling Paradox of Marijuana Stocks, we talked about how ETFs may not be the way forward for this theme because the large number of losers will offset the smaller subset of winners. Consequently, we want to try and cherry-pick some possible winners. You can’t go wrong placing your bets on the bigger dogs in the pack.
Pure-play disruptive tech stocks are not only hard to find, but investing in them is risky business. That’s why we created “The Nanalyze Disruptive Tech Portfolio Report,” which lists 20 disruptive tech stocks we love so much we’ve invested in them ourselves. Find out which tech stocks we love, like, and avoid in this special report, now available for all Nanalyze Premium annual subscribers.
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