marijuana. Ben Phillips, Chief investment officer of EventShares, warns investors to remain cautious on the burgeoning sector, because should cannabis ever be legalized in the U.S., "every incremental piece of demand will be met with oversupply."” data-reactid=”22″>Not everybody is bullish on marijuana. Ben Phillips, Chief investment officer of EventShares, warns investors to remain cautious on the burgeoning sector, because should cannabis ever be legalized in the U.S., “every incremental piece of demand will be met with oversupply.”
EventShares U.S. Policy Alpha ETF (PLCY), a unique fund that tracks companies exposed to changes in U.S. government policy and regulation. The ETF takes long and short positions in companies exposed to several public policy themes, including innovation in health care, defense appropriations, infrastructure development and more. ” data-reactid=”23″>Phillips is the portfolio manager for the $19 million EventShares U.S. Policy Alpha ETF (PLCY), a unique fund that tracks companies exposed to changes in U.S. government policy and regulation. The ETF takes long and short positions in companies exposed to several public policy themes, including innovation in health care, defense appropriations, infrastructure development and more.
So, yes, there’s an opportunity here. There’s a policy push, with the states leading the way. But long story short, we think the fundamentals just aren’t supporting investments in these stocks. A lot of them are better shorts, in our view. You’ll get better opportunities to buy them at lower levels, we think, especially in a downturn.
This is a money play. Enthusiasts are investing in it, and that could wane in a downturn when you have some of the retail money exit the sector, even just temporarily. That’ll cause pressure on the sector.
Marijuana stocks are really volatile, and they’re not really being driven by the fundamentals. They’re being driven purely by sentiment. They’re not being driven by policy changes either. So we generally don’t want to step into a situation like that. Cannabis falls into the category of “just avoid for now and watch.”
Marijuana takes four to six months to go from initial plan to harvest. That’s a very short lead time. It’s a very productive crop that grows fairly easily, if you know what you’re doing.
Think about just a few acres of cornfield converted into outdoor cannabis. Take Missouri, my home state. There’s very fertile land that’s very good for growing a crop like this. And then there are all the zones that can easily convert for a higher-margin crop.
There’s just going to be constant oversupply that will keep pushing prices down. We’ve seen it happen. When recreational [marijuana is federally legalized], the price drops 25-50% from the prior year:
If marijuana becomes legal on a federal level, every incremental piece of demand will be met with oversupply, in our view. There’s going to be a constant price pressure pushing down on the wholesale side: It’ll be on the price of the crop, initially, but also it’ll play out through the entire supply chain, impacting not just growers, but retailers who now have a lower price point and have a lower margin.
There’s state momentum, and there are instances where states are leading enough of a policy push that we think it’s creating inertia to drive federal change. But we still want to see more acceptance and movement on the federal front.
Second, we’d need to see the valuations of these companies rationalized. We just need a better entry point in these stocks. And that entry point is 80% [or more] below where we are today. So we’d need a really massive revaluation of the entire sector before we start seriously considering investing.
So we’ve been buying tobacco stocks, primarily on overblown fears about regulation, but also as a backdoor way into cannabis, when we didn’t think valuations were appropriate on the pure plays.
Also, I’d say the smart money is exiting cannabis right now. The private investors, who are there with venture capital in the early-stage stuff, they’re exiting, too. They’re not sticking around to see what happens in a down cycle, or over the next 10 years as [marijuana] becomes really commoditized and widely available. That’s signaling something to me too.
lcrigger@etf.com
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