- High-flying and volatile cannabis stocks have caught the attention of both Main Street and Wall Street this year.
- Canada recently became the second country to legalize recreational cannabis, and Michigan joined nine states and Washington, DC, in allowing full use of marijuana.
- The money manager Ken Mahoney explains why so-called pick-and-shovel companies are a great way to take advantage of the opportunities that cannabis brings while avoiding the volatility of weed stocks.
High-flying and volatile cannabis stocks have caught the attention of both Main Street and Wall Street this year, especially with Canada and Michigan recently legalizing the recreational use of marijuana.
While traders are embracing the opportunities of the "green rush," they should be aware of the high volatility of pot stocks, said Ken Mahoney, the CEO of the New-York based Mahoney Asset Management.
"When there is a lot of excitement about it, I get worried because the valuations are stretched," Mahoney said. "People don't do enough homework before they invest."
Mahoney, who offers clients retirement solutions, says his experience shows smaller investors always end up in the wrong direction when a new concept comes to the market because there's always a high level of uncertainty.
"It’s hard to find the ultimate winner," he said. "It's hard to be the stock picker."
So, instead of buying individual cannabis stocks such as Tilray, Aphria, Cronos Group, Aurora Cannabis, or Canopy Growth, Mahoney recommends using a "pick-and-shovel" strategy, which involves investing in the underlying technology needed to produce cannabis rather than in the final product.
Most weed stocks are new to the market and don't have a record of revenue or profits to support what Mahoney calls their "outrageous valuations." But pick-and-shovel companies, which provide services such as fertilizing, real estate, and packaging for marijuana producers, already have a well-established business and can capitalize on the opportunities that cannabis brings.
Below Mahoney gives four stock picks and explains why he likes them:
Innovative Industrial Properties
Ticker: IIPR
Industry: Real estate
The first marijuana-related real estate firm to be publicly traded, Innovative Industrial Properties (IIPR) provides real-estate solutions and capital for the medical-use cannabis industry. With big bank and direct equity investments hard to come by due to strong federal laws and regulations, IIPRs sale and leaseback option is becoming increasing popular in the industry. It currently runs over 10 properties and has more than half a dozen growers in operation.
Source: Mahoney Asset Management
Scotts Miracle-Gro
Ticker: SMG
Industry:Growing & Fertilizing
A manufacturing firm with a 150-year history. Scotts Miracle-Gro offers fertilizers, plant foods, seeds, soils and pest controls. SMG purchased of one of the top hydroponic companies in the United States, Sunlight Supply, for $450 million began to develop its presence in the marijuana market.
Coupled with the recent law changes in Canada and some US states legalizing marijuana, its hydroponics business, which is the process of growing any plant, including marijuana, has been improving.
SMG has more than 1,000 retail locations spread across major legal marijuana states in the US, so any soil, fertilizer, pest control, or even simple gardening products bought will most likely fall under the SMG brand.
Source: Mahoney Asset Management
GW Pharmaceuticals
Ticker: GWPH
Industry:Testing & medical treatment
A British bio-pharmaceutical company recognized for its use of cannabinoid-based drugs for medical treatments. In 2010, one of its products was approved and used in the UK to help treat multiple sclerosis. But more recently (June 2018), here in the United States, it was the first drug-maker to be approved for a cannabis derived drug by the US Food and Drug Administration.
Source: Mahoney Asset Management
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