Marijuana ETF On Wild Ride in September, Will It Continue?

As we close in on October 17th, the official day that Canada legalizes marijuana, potential investment opportunities in the industry continue to attract new money, and share prices have ballooned. But the real question is whether or not the boat has left you at the dock or if there is still time to get in on this party.

Anyone that follows the stock market has undoubtedly heard of the top few marijuana stocks by now. Companies like Tilray (TLRY), Canopy Growth (CGC), or Aurora Cannabis (ACBFF), just to name a few have been highly reported on over the last few weeks, increasing interest and moving their share prices. These companies have seen outside investments from alcohol companies, and interest in their business’s increase as both investors and other industries try to position themselves for what some believe will be the ‘next’ great investment frontier.

Tilray, which just went public in July, has seen its share price go from below $30 to as high as $250 in mid-September. That jump, in particular, sent the price of the only U.S. listed marijuana ETF, ETFMG Alternative Harvest ETF (MJ) to its highest level ever on September 20th at $43.01. After closing August at just $33.48, on September 20th MJ was up 28% for the month but ended up closing the month down just slightly from that level at $40.05, which by the way was still a 19.6% gain in September.

It should also be noted that MJ was a top ETF performer in August, rising 27.7%. In August MJ got a boost from the alcohol companies, Constellation Brands (STZ) announcing it was increasing its stock in Canopy. Molson Coors Brewing (TAP) reporting it had entered into a partnership with Hydropothecary Corp to create a cannabis-infused beverage, and Diageo (DEO) apparently being in talks with a few different Canadian based marijuana companies about either partnering or buying stakes in their businesses.

MJ’s performance in August continued in September, but are we going to see the same trend in October or even further out in 2019?

To figure that out the answer we can look at the past. When California legalized marijuana at the start of 2018, we saw a similar upward trend in both MJ and the marijuana stocks in general. A flood of new money wanted to get in before it was too late, so the prices climbed. But, shortly after the start of the year and investors realized valuations had been stretched because the profits for all the companies competing in the industry were not justifying the prices, shares fell.

One argument of why ‘this time will be different’ is that California is just one state. Canada, on the other hand, is a whole country. The thinking is, the market is much larger, and therefore there will be more revenue, and hopefully, profits, to go around. While I do believe that will be the case, I also think the hype is a little overblown or at the very least that wherever MJ and the marijuana stocks climb to leading up to October 17, that we will see a substantial pullback in the days or weeks following.

In the short term, we will likely continue to see unprofitable business as the industry is currently very fragmented and high costs with lots of competition will most likely keep margins low. Consolidation, partnering, and business failures will likely scatter the marijuana industry landscape for some time as it matures.

Longer term, the strong will survive and grow into profitable businesses with more reasonable valuations. Investment opportunities will be less risky, and therefore less money will be made with these stocks.

I personally believe that if you are just getting into the industry today, you may have missed the big run-up before October 17, but then again there is still likely money to be made if you buy before that date and plan to get out shortly afterward. If you want to buy a piece of the marijuana industry and hold it long term, you would probably be best to wait until November or December to start buying individual stocks or better yet, ETFMG Alternative Harvest ETF (MJ) itself. That way you can let the current hype die down, allow the stock prices cool and buy knowing that the next big catalyst will be earnings reports, not an arbitrary date and speculation.

Matt Thalman Contributor - ETFs
Follow me on Twitter @mthalman5513

Disclosure: This contributor did not hold positions in any of the companies mentioned 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 for their opinion.

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