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Buy the Dip in Marijuana Stocks & ETF?

Sanghamitra Saha

After a monumental January, marijuana stocks and the related ETF took a dive on Feb 6, 2019 thanks to two adverse news. Canadian cannabis company Aphria Inc.’s APHA rejection of a hostile bid and clampdown on CBD’s use in edibles, per an article published on MarketWatch.

Inside the Factors That Hit the Space on Wednesday

Aphria rejected a hostile bid from Green Growth Brands Inc. as the former believes the latter undervalues the company considerably. Aphria shares shed more than 9.4% in the key trading session and 4.3% after hours.

Green Growth’s January’s offer marked a 23% discount to Aphria’s share price, based on the 20-day volume-weighted average price of Green Growth stock immediately before its bid was announced, per Aphria. The company’s shares are up more than 70% this year.

Added to this, New York City has cracked down on edibles that include CBD, or cannabidiol. In January, the Los Angeles County Department of Health also announced it would be cutting points on restaurant inspections for CBD’s use in prepared food and drink starting in July. There are states like Maine, which has legalized recreational cannabis, and Ohio, which has a medical-marijuana program in place, have also clamped down on CBD edibles, per the source.

The compound can be derived from both cannabis and hemp plants. Though industrial hemp cultivation was legalized in the United States in late 2018, the Food and Drug Administration in the United States continues to treat CBD in the same manner irrespective of where it is coming from.

Inside Losses

The pure-play marijuana fund ETFMG Alternative Harvest ETF MJ lost about 5.3% on Feb 6, 2018 and shed about 1.3% after hours. Two of Canada’s top cannabis producers Canopy Growth Corporation CGC and Tilray Inc. TLRY retreated about 4.3% and 6.2%, respectively, on Feb 6. CGC and TLRY shares slumped about 3% and 0.8%, respectively, after hours.

Aurora Cannabis Inc. ACB too plummeted about 4.2% in the key trading session and 1.7% after hours. Cronos Group Inc. CRON was down about 10% and 1.8% in the key trading session and the after-market sessions, respectively. 

Is It a Value Play or Value Trap?

Growing efforts of legalization, both for medical and recreational usages have been rampant for cannabis globally, of late. Laws related to marijuana have been changing in the United States too, but it is still in early stages and illegal on the federal level (read: Pot Stocks are on a High: Play These Marijuana ETFs).

Even states, where cannabis is legal, appear doubtful of permitting restaurateurs to put CBD into random products. While the plant derivatives should cross all regulatory barriers over the long term, for now, more crackdown could be in the cards.

Some analysts are of the view that Canadian pot stocks are overtly valued than some American pot stocks compared with demand opportunities. America is much more densely populated than Canada. Thus, multi-state operations or putting more stress in larger states like California and Florida could offer U.S. pot companies considerably higher business opportunity (read: 4 Reasons Why Pot Stocks & ETF Could Be on a High in 2019).

Why to Invest in MJ?

There is the lesser direct accessibility to U.S. pot companies as “only Canadian-based companies [are] listed on the US exchanges, while, paradoxically, US companies have been forced to list on Canada’s junior exchanges.” Thus, it is better to tap the space in the form of ETF MJ.

The fund has a global exposure and gives proper view of the continuously changing regulatory backdrop of marijuana worldwide. Canada has about 62% exposure, followed by 24.2% in the United States and 6.6% in United Kingdom. Cronos Group (18.6%), Canopy Growth (8.7%) and Aurora Cannabis (7.7%) are the top three holdings of the fund.

The fund has become so popular that it crossed the $1-billion mark after less than 14 months of NYSE trading. The fund is up about 38% this year. Growing mergers and acquisitions and long-term potential from the cannabis-infused beverage industry should drive the fund higher, if regulatory hurdles do not come in the way.

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