The marijuana industry is growing like a weed, and marijuana stocks as a whole have been carried along in tow. Over the past year, a number of marijuana stocks have seen their valuations double, triple, or, in the case of AXIM Biotechnologies, rise by more than 3,600%.
Here's why marijuana stocks are budding
Central to this optimism is the rapidly changing views of the public concerning cannabis. Both the 2016 Gallup poll and the more recent CBS News poll, both of which asked respondents whether they'd be in favor of legalizing recreational weed nationwide, have seen support for legalization climb to an all-time high (60% for Gallup and 61% for CBS News).
Similarly, we've also seen exceptional growth in legal sales, partly a result of changing public opinions, and partly because pot is legal in more states now than it's ever been. Residents have voted to legalize recreational marijuana in eight states since November 2012, and over the past 21 years, 28 states have legalized the use of medical cannabis. The legal channels for weed have grown practically every year -- and we may just be at the tip of the iceberg.
Our neighbors to the north are currently debating legislation introduced by Prime Minister Justin Trudeau that would legalize recreational marijuana throughout Canada by as early as 2018. Legalizing weed in Canada for adult use could be a $5 billion to $7 billion annual boon for the industry. Likewise, Mexico is moving forward with legislation that could soon legalize the use of medical cannabis.
Surprise! The very first marijuana ETF has been a dud so far
Yet, in spite of the phenomenal growth the legal weed industry is experiencing, and the amazing trailing one-year returns for pot stocks, the recently debuted marijuana stock ETF, the Horizons Medical Marijuana Life Sciences ETF (HMMJ -2.04%), has actually lost value for those who've decided to take the plunge. Shares of the ETF have lost more than 4% from where they were initially priced on their first day of trading a little more than five weeks ago and ended at a fresh all-time low on May 9.
The Horizons Medical Marijuana Life Sciences ETF has holdings in 16 medical-marijuana companies, as well as companies that are loosely involved with the medical pot industry. An example would be traditional lawn and garden company Scotts Miracle-Gro (SMG -1.97%), which provides lighting, nutrients, and soil for growing cannabis that's used for medical patients. Scotts is currently the ETF's third-largest holding by weighting.
The purpose of this ETF (as with all exchange-traded funds) is to help investors spread their risk across a basket of stocks. Instead of having to invest in dozens of pot stocks to be diversified, investors can buy a single ETF that spreads that risk around for a nominal annual expenses ratio of 0.75%.
Unfortunately, the early going for this pot-based ETF hasn't been pretty.
News flash: Fundamentals still matter
Some investors are probably scratching their heads and wondering how they could possibly have lost money on a marijuana ETF when legal weed-industry growth is expected to come in around 25% over the next five years. The answer is pretty simple, actually: Fundamentals still matter.
Though marijuana stocks have seen their sales grow rapidly, many are starting from an exceptionally small sales base (which is to be expected for a federally illegal substance), and many still aren't anywhere near turning a profit. As investors have taken a step back, they may have realized that a number of the pot stocks in the Horizons Medical Marijuana Life Sciences ETF are valued very richly, even if they have a bright future.
GW Pharmaceuticals (GWPH), which is the unquestioned king of marijuana stocks based on its $2.8 billion valuation, has a very promising experimental therapy in Epidiolex, which breezed through multiple pivotal phase 3 trials for two rare types of childhood-onset epilepsy. By all accounts, the Food and Drug Administration (FDA) has the data needed to approve Epidiolex, but nothing is ever a guarantee with the FDA.
Nonetheless, it could be a year or longer before GW Pharmaceuticals begins recognizing any recurring revenue, if Epidiolex gets the green light. Chances are it'll await scheduling from the Drug Enforcement Agency post-approval, which will delay its launch. In other words, investors are paying about 40 times what Wall Street expects GW Pharmaceuticals to generate in profits by 2020! That's really looking to the future!
The same goes for Aurora Cannabis (ACB -6.20%), which has become the second largest holding by weighting. While Aurora Cannabis has turned heads with its aggressive 800,000-square-foot Aurora Sky project that'll boost its growing capacity more than eightfold, it's still losing money despite increased demand from the legal medical-cannabis market.
In fact, just a small handful of companies in the very first marijuana-stock ETF are profitable.
Ultimately, investing is a numbers and idea game. While the idea of legal marijuana is intriguing and the growth estimates are certainly juicy, there isn't much in the way of fundamental data at the corporate level to back that thesis up just yet. Until that thesis makes sense, this marijuana-stock ETF may prove to be nothing more than gimmicky at best.