A (Relatively) Safe Way to Invest in Marijuana Stocks?

If You Like Pot Stocks But Don’t Like Risk…

In the investing world, higher returns often come with higher risk. And that’s why, even though some industries have made plenty of investors rich, a lot of people are still standing on the sidelines.

Take a look at cannabis, for instance. People have been using pot for a long time, but due to the illegal status of the substance in many jurisdictions, most pot businesses could not operate under broad daylight.

In recent years, though, regulations started to change, and the industry has gotten a lot of investor attention.

In the U.S., recreational marijuana is legal in 11 states and D.C. Meanwhile, medical pot is legal in 33 states and D.C.

North of the border, the Cannabis Act came into effect on October 17, 2018, legalizing weed for recreational use across Canada.

Needless to say, a lot of pot companies have flourished under the new regulatory environment. But because the industry is still at an early stage, investors don’t really know how big the market will eventually be, or which companies will be successful in the long run.

It doesn’t help that pot stocks can be very, very volatile. Even though several cannabis companies are now listed on major stock exchanges like the NYSE and the Nasdaq, their share prices can still make big swings to either side.

For the smaller pot companies that trade over the counter, things can get even more unpredictable. It’s not uncommon to see a pot stock make double-digit gains in one trading session and then take an even bigger tumble in the next session.

That’s why, if you are a risk-averse investor, your financial advisor would probably recommend that you stay with more “boring” (and less volatile) industries like utilities and consumer staples.

But sometimes the gains from the pot stock market are just too good to pass up.

Take a look at Canopy Growth Corp (NYSE:CGC). The Smiths Falls, Ontario, Canada-based cannabis company went public on the TSX Venture Exchange through a reverse takeover in April 2014.

At that time, it had a stock price of CA$2.59. Today, Canopy Growth stock trades on both the Toronto Stock Exchange and the New York Stock Exchange. In Canada, its share price currently stands at CA$28.88. That translates to a total return of 1,015%!

In other words, if an investor had put $5,000 into Canopy Growth Corp back when it went public, the position would now be worth over $55,000.

Of course, as I mentioned earlier, pot stocks still face a lot of uncertainty.

And even though Canopy Growth stock shot through the roof, there were many other stocks that didn’t do nearly as well. And when you see a company coming from a nascent industry, you probably don’t want to put in too much money up front.

How Risk-Averse Investors Can Climb On Board the Marijuana Profit Train

The good news is, risk-averse investors don’t have to stand on the sidelines. Right now, I’m going to show you a relatively safe way to get some exposure to the booming cannabis industry.

When people talk about pot stocks, they are usually referring to companies that operate entirely in the marijuana industry, such as cannabis growers, processors, and retailers. These are called pure-play companies, and offer investors the most direct exposure to the pot industry.

But there are also companies that have been operating outside the cannabis industry for many years but have recently developed some operations in the sector. These are called non-pure-play companies.

Their share prices can rise when investor enthusiasm is high for pot stocks. At the same time, because they also have sizable operations in non-pot industries, they provide investors a reason to hold onto their shares even when the sentiment toward pot stocks turns bearish.

A good example of a non-pure-play pot stock is Village Farms International Inc (NASDAQ:VFF). Headquartered in Delta, British Columbia, Canada, VFF is a greenhouse operator that specialized in producing greenhouse tomatoes, bell peppers, and cucumbers.

The neat thing is, Village Farms also has a majority stake in Pure Sunfarms Corp., one of the largest vertically integrated cannabis producers in Canada.

Pure Sunfarms has a marijuana growing facility with a conservative projected annual yield of 150,000 kilograms (330,693 pounds). (Source: “An Unmatched Platform for the Global Cannabis Opportunity,” Village Farms International Inc, last accessed February 5, 2020.)

And while legal cannabis is still a new industry, Pure Sunfarms has already been contributing to Village Farms International’s financials.

In the first nine months of 2019, Village Farms’ proportional share of Pure Sunfarms’ financial results included $26.6 million of cannabis sales and net income of $17.3 million. (Source: Ibid.)

Pure Sunfarms’ “Delta 3” facility is already operating at full run-rate annual production of 75,000 kilograms (165,347 pounds).

Meanwhile, the company expects its “Delta 2” facility to complete its first harvest in mid-2020 and reach the same full run-rate annual production by the 2020 fourth quarter.

Pure Sunfarms is a low-cost producer; in the third quarter of 2019, the company’s all-in cost to produce one gram of cannabis was just CA$0.63.

Notably, in October 2019, Pure Sunfarms was the No. 1 dried flower brand. It also had a 16% market share with Ontario Cannabis Store, which serves as the wholesale distributor to legal pot stores across Ontario, which is Canada’s most populous province.

Obviously, the booming cannabis business can be a major catalyst for VFF stock. But like I said, this is a non-pure-play company.

As a matter of fact, Village Farms also generates tens of millions of dollars in produce sales every quarter. (Source: “Village Farms International Reports Third Quarter 2019 Financial Results,” Village Farms International Inc, November 14, 2019.)

Even though there was a big sell-off in pot stocks last year, Village Farms stock is up a whopping 75% since the beginning of 2019.

The non-pure-play nature of Village Farms International might be a reason behind the resilience of VFF stock.

Village Farms International Inc (NASDAQ:VFF) Stock Chart

Chart courtesy of StockCharts.com

Analyst Take

At the end of the day, keep in mind that there are quite a few non-pure-play pot stocks on the market.

For instance, alcoholic beverage company Constellation Brands, Inc. (NYSE:STZ) has a sizable stake in Canopy Growth Corp, while tobacco company Altria Group Inc (NYSE:MO) owns a decent chunk of Cronos Group Inc (NASDAQ:CRON).

These are companies with sizable operations outside of pot: Constellation Brands makes various alcoholic drinks and Altria makes cigarettes.

Non-pure-play pot stocks might not sound as exciting as, say, a company that’s on track to become the next major cannabis producer. But for risk-averse investors, investing in non-pure-play stocks could be a relatively safe way to get a piece of the action in the marijuana industry.