Pot Stock Pro On Telling Growth from Hot Smoke

Balance your trading strategy by adding futures. CME Group helps you manage risk and capture opportunities in all market environments. Capitalize on around-the-clock access to highly liquid global futures and options markets across all major asset classes. Visit your online broker to get started. See what adding futures can do for you at cmagroup.com/podcast. Derivatives are not suitable for all investors and involve risk of losing more than the amount originally deposited and any profit you may have made. This is not a recommendation or offer to buy, sell, or retain any specific investment or service.

So now what's happening? Once again, it doesn't matter if a company has money on their balance sheet or has profitability or it's purely a hyped name, all the cannabis stocks are trading way up. And it might be even worse with some of the companies with the worst financials. Some of the companies that had been down the most in the last couple years are maybe trading up the most right right now on hype, on Reddit, on WallStreetBets, and even short squeezes.

Welcome to the Barron Streetwise Podcast. I'm Jack Howe. The voice you just heard, that's Dan Ahrens. He is the manager of the AdvisorShares Pure Cannabis ETF. In other words, he picks pot stocks and his fund is up 185% over the past year. Including 80% so far just this year. Why? The United States is steadily legalizing recreational marijuana use, leading to solid and fast-growing profits for some companies. But also, chat room trading has taken some recent stock gains to extremes. It's like GameStop and Bitcoin got married and had a baby and named it cannabis. In a moment, We'll hear from Dan about how to tell short-term hype from long-term growth potential and which stocks he favors now. Listening in is our audio producer Meta. Hi, Meta.

Hey, Jack.

Meta, it's official. I'm pretty sure that we're prudes now.

Uh-oh.

We're New Yorkers, you and I, which I thought made us fairly cool, but our neighbors, the state of New Jersey, they've legalized recreational marijuana and that's what all the cool people are doing. This past November, there was a referendum and 67% of New Jersey voters said legalize it. That took effect January 1st. You still aren't allowed to pump your own gas in New Jersey, by the way. That's too dangerous. But pot is now legal. There's no word yet on whether residents will be permitted to roll their own joints. Meta? Are you still there? Have you left for Hoboken? Just what I was afraid of. I should have mentioned, by the way, legalization is so new in New Jersey that supporting legislation hasn't passed yet. So there aren't pot cafes or a big retail trade just yet, but it's coming. And it's not just New Jersey. Arizona, Montana, and South Dakota also voted in November to legalize recreational marijuana. Mississippi and South Dakota approved medicinal marijuana measures. Think about that. New Jersey is a blue state. Arizona turned blue in November too. The rest of these states are pretty solidly red. There isn't supposed to be much bipartisan agreement right now, but cannabis is suddenly bringing voters together. New York appears likely to legalize pot as soon as this year. Some states might be eyeing the experience of Colorado, which last year did a record $2 billion in marijuana sales through state dispensaries raising $387 million in taxes and fees. There's more going on in the cannabis industry than legalization. A company called Jazz Pharmaceuticals recently agreed to buy another company called GW Pharmaceuticals for more than $7 billion. Now GW specializes in cannabinoids, and if you're guessing that cannabinoids are cannibalistic humanoids, I have a pleasant surprise for you. They're not. They're just compounds found in cannabis, and some of them have medical uses. GW has a drug called Epidiolex, which has been approved by the FDA for treating certain types of seizures. Jazz's purchase of GW is the biggest cannabis takeover to date. Meanwhile, the London Stock Exchange just approved its first cannabis stock listing in its 320-year history. All of this has contributed to plenty of excitement around pot stocks. Industry giant Canopy Growth was recently up 111% just since the beginning of this year. Another one, Sundial Growers, is up more than 500% year to date. That's more than a rally, it looks more like a melt-up. Remember 2 weeks ago when we talked about the creator of a popular stock trading chat room on reddit.com called WallStreetBets, about meme trades and how that helped explain recent movements and things like GameStop shares and certain cryptocurrencies? Well, a recent analysis of stock ticker mentions on that forum found that Sundial Growers, the cannabis company, had overtaken GameStop and other cannabis names weren't far behind. To learn more about hype versus reality in the pot stock rally, I checked in with someone who puts money to work in pot for a living.

Hi, Jack. Dan Ahrens here.

Oh, hi, Dan. Thanks for making a few minutes to speak with me.

Of course. Good to talk to you.

Dan Ahrens manages the AdvisorShares Pure Cannabis ETF. Pot stocks have been incredibly volatile. They gave back some of their gains this past Thursday, shortly after I had spoken with Dan and recorded the bulk of this episode, which I think reflects just what Dan talked about. He said he's seen something a bit like this before.

You know, to get the whole story, you might even want to back up a couple years when, you know, they first legalized in Canada. All the, uh, cannabis names traded up on pure enthusiasm. Nothing but enthusiasm.

Everyone's talking about cannabis right now.

Some folks are saying it's like the next crypto craze. Today, what happened with Tilray? It was a complete roller coaster ride for the stock today after jumping as much as 90%, being halted multiple times this afternoon. The stock has settled and closed here. It is up over 38%.

And then when actual results started, you know, coming in a year later, everything really crashed and burned because those prices were based on hype.

Now, if you want to run an exchange-traded fund focused on cannabis, you must have a catchy ticker symbol. That's Marijuanaonomics 101. There's the ETFMG Alternative Harvest ETF, ticker MJ, as in Mary Jane, a nickname for marijuana, and the Cannabis ETF, ticker THCX, which is a play on THC, the main psychoactive compound in cannabis, the part that gets you high, in other words. And don't forget Global X Cannabis ETF, ticker POTX, and Cambia Cannabis ETF, ticker TOKE. Meta, I'm not losing you here with my super insider pot terminology, am I?

No, I'm very impressed.

Now Dan's fund is pretty unique in that it's based on active stock picking, not indexing. It's called AdvisorShares Pure Cannabis, and the ticker is YOLO, which is an acronym for You Only Live Once. That's something Reddit traders like to post with their momentum stock tips, so you'd think Dan would favor go-go momentum stocks without paying too much attention to things like earnings. But in fact, Dan told investors last year that he expected a big pot stock separation, with gains for quality companies with earnings and healthy balance sheets outpacing those for flakier companies. And that's what happened last year. His fund, ticker YOLO, was up 47%. For comparison, the Alternative Harvest ETF I mentioned earlier, ticker MJ, That one tracks an index and it was down 11%. But that was last year. Things have changed. Here's Dan.

Once again, it doesn't matter if a company has money on their balance sheet or has profitability or it's purely a hyped name, all the cannabis stocks are trading way up.

This is not quite a GameStop situation where Bets against that stock, called short selling, had reached extreme levels, creating conditions for panic buying as prices rose and short sellers raced to stop their losses from growing. Short selling in pot stocks going into the year was elevated but not quite as extreme. Dan says he thinks stock picking is a better fit for the cannabis industry for now than indexing, which is one reason he gives for his outperformance last year. Another is his relatively heavy U.S. exposure. Canada legalized pot in 2018, which is why so many of the cannabis companies trade there, but the U.S. is a larger and more promising market.

You know, they legalized in Canada and then they discovered that the Canadian market's not all that big, and they were faced with oversupply. The government in Canada actually had a really lousy rollout not enough stores to sell to the public, all sorts of things. But it doesn't change the fact that the US market is more than 10 times the size of the Canadian market. I mean, the single state of Colorado is a much bigger market than the entire country of Canada.

Dan says the outlook for cannabis legalization in the US is bright.

Biden in the White House, control of the Senate. They're talking about something called SAFE Banking Act. These US slant-touching operators don't even have access to regular banking. They have a huge tax disadvantage called 280E. That's proposed to get fixed in the next year or so. Back up to the Democratic Party platform, they talked about nationwide medical marijuana, nationwide medical, but when it comes to recreational, they talked about leaving it up to the states. There's two different proposals, one called the MORE Act, one called the States Act. People think it'll be some combination that still has to get negotiated, but it supports states' rights. So these states that have legal recreational marijuana use would not be contrary to federal law and decriminalizing it.

At the same time, Dan says investors excited about US legalization shouldn't get ahead of themselves.

It's not going to be the Wild West of everything's legal, everywhere. And the fact that these US companies can't list on the major exchanges yet, like the New York Stock Exchange or NASDAQ or even the Toronto Exchange, they don't have near the trading volume and access to capital that some of these big names like Canopy and Tilray and Aurora have. And a lot of people, it's a sympathy trade. And when these things get hot, these short-term traders trade them up. And if they're trading them for profit, more power to them, but no one should confuse a short-term trade in something that's hot versus cannabis names that should be, you know, a true generational opportunity, a real long-term buy and hold opportunity like we have in the United States.

There's a lot of variety among cannabis stocks. Some are pharmaceutical companies, like we mentioned, Others are real estate companies that buy land from cannabis operators and lease it back to them, which frees up capital for those cannabis operators to invest in their growth and gives the real estate companies stable income. And then there are growers and sellers, what Canada calls licensed producers and the U.S. calls multi-state operators.

In the United States, you have to have redundant operations in each state. You're not allowed to take cannabis, marijuana across state lines is the simplest way to think of it. So these companies are usually vertically integrated. Vertically integrated means they grow it, they produce it, they sell it in their own dispensaries, they have their own products. We see that in Canada and we see that in the United States.

The cannabis industry uses the term plant touching to describe when companies literally come into contact with cannabis. Plant touchers have relatively high regulatory exposure. U.S. companies that touch the plant are restricted in where they can operate and also where they can trade.

They also can't list on the major exchanges yet. They're still exchange listed for the most part. They list on a smaller Canadian exchange and then trade in the over-the-counter market in the U.S. But we're still talking about multi-billion-dollar companies here, and in many cases in the United States.

Recent gains for cannabis stocks have attracted a lot of new investors to the ETFs, and Dan, he's not complaining. He also oversees a US-only cannabis ETF that launched in September with $2.5 million. Now it has over $900 million. The ticker there is MSOS, which I guess stands for multi-state operators. That's an okay ticker symbol. I mean, I can't help but notice that the ticker GRAS is still available. Doesn't anyone call cannabis grass anymore? What about BONG? Actually, there's a Swedish packaging company named BONG, so that might get confusing. Now BUDZ with a Z, that's taken. That's a company called Weed. And WEED is taken. That's Cannabi's ticker on the Toronto Exchange. What about BGRT, which is pretty close to Bogart, which means to selfishly appropriate a lit joint. Meta, how hip do I sound right now on a scale from 1 to 47 years old?

I think you sound pretty dope when you talk about ganja, dude.

You took my best ones coming up. I asked Dan to tell me about some of his favorite stocks right now. Even after the recent run-up. One of them is Cura Leaf Holdings, which trades over the counter in the US under the ticker CURLF.

Cura Leaf by sales is actually the world's largest cannabis company. They're bigger than Canopy, but they don't get the press on the major mainstream media that the big Canadian names get.

Another stock Dan likes is Trulieve Cannabis. TCNNF.

Trulieve has over 50% of the market in Florida. Florida's only a medical marijuana market to date. It's a very strong medical marijuana market. Trulieve's expanding into a number of other states, but the real bread and butter is dominating in Florida. And again, I think it's scratching the surface because most people think adult use recreational is going to come to Florida some point in the near future.

Both of these companies are expected to more than double their free cash flow next year, in Cura Leaf's case to nearly $300 million, and for TruLeaf to a little over $200 million. Dan also mentioned Green Thumb Industries, GTBIF, and Cresco Labs, CRLBF. Both of those are focused on the American Midwest.

A lot of people refer to those as the Big Four or the Four Horsemen. Again, we're talking about multi-billion-dollar companies here, strong balance sheets, profitability in many cases, or at least a clear path to profitability depending on what their acquisition and growth strategy has been. But those four big names are where we focus most of our interest in the United States.

Just to be clear, we're talking about cannabis this week because of all the share price activity so that investors who wish to get involved can hear some of the basics. This is not me telling investors that it's time to go all in on pot. Personally, I don't do a lot of thematic investing unless putting regular savings in broad market index funds counts as a theme, but not all investors share my tastes. Also, we're talking here about some of the higher quality cannabis names, but if you're a day trader who likes to take a lot of risk with a little bit of money, you might want just the opposite. It's not my thing, but best of luck. Just try not to Bogart all the gains flipping cannabis stock schwag. Meta, schwag is a term for marijuana of inferior quality, so here I've appropriated it to use as a metaphor for low-quality stocks. I feel like I'm really connecting with younger listeners right now.

I think you are. I feel like everyone can sense that you're wearing a baseball cap turned backwards right now.

If you want to learn more about investing in cannabis, Dan has a new book out on the subject called Investing in Cannabis. Putting aside recent trading in cannabis shares, How does he think about the long-term outlook for the cannabis industry now? He is, as you might imagine, quite bullish.

You know, we have medical marijuana legal in over 30 states. We have recreational only approved in the teens so far. So think about a big state like New York, where Cuomo's talking about adding adult use. Right now, there is no legal market. There's, there's a medical market in New York, but there's not a legal market. All those sales are going to the black market. We're suddenly going to have these recreational sales in a place that it didn't exist at all in a state like New York. The upside is huge.

Dan sees a comparison between now and a similar situation just over a century ago.

It's like investing in alcohol. Back at the end of Prohibition. And if you had invested in a basket of alcohol stocks back at the end of Prohibition, you would've outperformed every single other industry except for tobacco, actually. And tobacco also has a lot of overlap to cannabis, obviously. So we think the opportunity is huge and it's very, very much still in the first inning. And even though these US operators have gone up a great deal in the last 6 months, we think it's still just getting there because these companies can't even do interstate commerce. They can't do international commerce. They don't do banking yet. They can't even deduct their business expenses because of 280E. And they certainly can't list on the New York Stock Exchange yet. And everybody thinks that's going to change in the near future.

Thank you for listening. Meta Lutzoff is our producer. Subscribe to the podcast on Apple Podcasts, Spotify, or wherever you listen to podcasts. If you listen on Apple, please write us a review. And if you want to find out about new stories and new podcast episodes, you can follow me on Twitter. That's @JackHough, H-O-U-G-H. See you next week.

Hey Jack, I have a blooper for you. Do you want to hear it?

I don't recall making any mistakes, but I'm willing to listen. Dan manages the AdvisorShares Pure Cannabis ETF. Hey man, that's one pure cannabis. I did that just for your benefit, Meta.

What's driving the markets this week? What's on investors' minds as they look ahead? Find out on The Markets Podcast from Goldman Sachs, a breakdown of market moves and macro signals in 10 minutes or less. The Markets Podcast from Goldman Sachs. Listen now.