In April the world's first Marijuana Exchange Traded Fund, Horizon Medical Marijuana Life Sciences ETF (TSE:HMMJ) hit the public markets. The ETF went public at $10 per share and popped during its first few days of trading.
When HMMJ hit the public markets, investors were craving exposure to marijuana stocks as new laws and regulations have helped push marijuana into the mainstream spotlight. Some U.S. states and parts of Canada have decriminalized the drug while it has spread in popularity and acceptance for its medical use.
HMMJ has traded as high as $23 per share since going public, but currently, it is below its Initial Public Offering price, trading at $9.36 per share. So what is happening and is it worth investing in the industry today?
First off, it is evident both the Marijuana high and hangover has now worn off for most investors, which could be an excellent thing. When HMMJ initially went public, the ETF was bid up much higher than it should have been. And now that most investors have come to their senses, the price is down to a reasonable level, giving current investors a good entry point.
But as of right now the ETF faces some hurdles. Since some states (the many that haven't already taken the plunge) and the Canadian government as a whole have considered legalizing marijuana altogether, there have been some different companies who have jumped into the industry. The high number of competition hurts margins and operating profits of the larger, more likely to survive companies. Also, the ETF doesn’t have a ton of marijuana businesses that are publicly traded or are reputable enough to invest in.
At its current state, the marijuana industry is very fragmented, and there are not any clear leaders in the industry. This makes it difficult to invest in the sector with any reasonable level of confidence. More so, the most recent data indicated HMMJ has nearly 85% of its $106 million in assets in just ten companies. If the fund were substantially more diversified, I would feel much better about investing in it because I wouldn’t be relying on the fund manager to cherry-pick the winners and losers in such a challenging industry.
But, that doesn’t necessarily mean I wouldn’t invest in HMMJ right now either. One research firm, Cowen & Co., has estimated that legal marijuana sales in the U.S. will hit $50 billion by 2026. To get to that $50 billion mark, it would appear the U.S. would need a lot of new users. According to ArcView Market Research, under the table marijuana sales hit $46 billion in 2016.
With tourism hitting new highs in cities like Denver Co., many believe the accessibility to legal marijuana is one driving factor. That has prompted cities like Las Vegas to pass laws legalizing the drug. But, some of the more conservative states are sitting back watching this all play out and how the sale of legal marijuana impacts a city.
Personally, though, I tend to believe it is just a matter of time until the vast majority of U.S. states legalize and profit from the sale of marijuana through taxes. Over the past 20 years, we saw the expansion of casino's throughout the U.S. as more and more state governments began to realize how much tax revenue they were losing to border states. Over time, I believe the same will occur with marijuana.
Which leads us back to investing in the marijuana industry.
Investors who jumped into HMMJ were certainly a little early back on April 5th, but I tend to believe that if you are looking at this industry as a long-term opportunity than buying shares today or even back then, is a smart move. If the Canadian government or a massive number of U.S. states announce they are legalizing marijuana, investors sitting on the sideline will have already missed their opportunity. The only way to profit from this changing of the laws is by investing in them changing.
Furthermore, Horizon Medical Marijuana Life Sciences ETF (TSE:HMMJ) will likely continue to add positions, lowering its exposure to each company it holds, as more and more companies operate in the industry. HMMJ.TO is also the first of its kind, but it's not likely to be the last. At this time it is easy to see how massive of a market opportunity the marijuana industry could have if laws are changed over the next 5 to 10 years.
With that sort of potential, anyone interested in the industry and has a little investable cash sitting around could do a lot worse than investing in HMMJ or one of its top holdings, (Insys Therapeutics (INSY), The Scotts Miracle Grow (SMG), Aurora Cannabis Inc. (ACBFF), , GW Pharmaceuticals (GWPH), Zynerba Pharmaceuticals (ZYNE) or Canopy Growth Corp (WEED).
Just remember, investing in this industry is very risky, and you should not put any money in it that you are not able to lose.
Disclosure: This contributor did not own shares of any equities mentioned above at the time this blog post was published. This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.