Growth in the marijuana industry has been incredible over the past few years, and investors are really beginning to take notice. Over the trailing one-year period, more marijuana stocks than not have seen their share prices at least double in value.
At the heart of these surging stock valuations is a major shift in the way consumers think about weed. In the 47 years that Gallup has questioned the American public about their views on pot, we've seen approval for national legalization grow from just 12% in the late 1960s, to about 25% in the mid-1990s, to 60% as of October 2016. This rapid and decisive shift suggests that there could be increased public pressure to get lawmakers to alter marijuana's scheduling at the federal level, where it's still illegal.
The result has been a huge increase in annual sales growth for legal cannabis. ArcView, one of the leading cannabis research firms, pegged 2016's growth rate in North America at 34%, and estimates that North American annual growth will come in at an average of 26% through 2021. Most investors would struggle to find an industry with such a consistently high growth rate.
These half-dozen companies heavily influence the first-ever marijuana ETF
Thus, when the first-ever marijuana ETF, the Horizons Marijuana Life Sciences ETF (TSX:HMMJ), hit the market on April 4, 2017, it was expected to be a hot-ticket item among investors. Even though it's a Toronto-listed ETF (although you can now buy it on the over-the-counter exchanges in the U.S.), the diversity it brought to the table was expected to lure in plenty of new money. Unfortunately, between April 4 and Oct. 4, investors didn't make a red cent. In fact, the ETF lost $0.02 in net asset value in its first six months, despite boosting the number of holdings in its portfolio from 14 to 21.
After six months, six holdings in the Horizons Marijuana Life Sciences ETF have risen to the top in terms of weighting. These six cannabis stocks comprise 58.2% of current investment holdings, with the remaining 15 companies accounting for the other 41.8%. Here's a brief rundown of the marijuana stocks that most directly influence the movement of the first-ever marijuana ETF, along with their respective weightings in parenthesis.
Canopy Growth Corp. (11.46%)
You'll note that three of the largest Canadian medical-cannabis companies are the top three holdings, in terms of weighting, for this ETF. Canopy Growth Corp. (NASDAQOTH:TWMJF) is the largest Canadian pot stock by market cap, and it's in the process of expanding its growth capacity to hopefully surpass 1 million square feet. With the number of eligible medical patients in Canada growing by 10% a month as of May, according to Health Canada, and the Canadian parliament discussing the possibility of legalizing recreational weed by July 1, 2018, there's a lot to for shareholders to be excited about.
On the other hand, Canopy Growth's acquisition-related costs, its expansion initiatives, and even new hiring, are all costs that have weighed on its recent bottom-line results. Despite promising operating results through the first three quarters of fiscal 2017, Canopy Growth produced a full-year loss. Nonetheless, its shares are up 27% over the past six months.
Like Canopy Growth, Aphria (NASDAQOTH:APHQF) is a Canadian-based medical-cannabis producer and retailer that's expected to benefit from growth in the medical market, as well as possible recreational weed approval. Aphria's more than $100 million phase IV organic expansion project should see it expand to 1 million square feet of growing capacity, giving it the ability to produce 100,000 kilograms of cannabis a year once completed.
Also, like Canopy Growth, Aphria delivered three incredible quarters of growth, only to produce a fourth-quarter loss tied to expansion-based expenses. The good news here is that Aphria still finished the year with positive EBITDA (earnings before interest, taxes, depreciation, and amortization) and a small full-year profit. Among Canadian pot stocks, Aphria appears to be on the most solid financial footing.
Aurora Cannabis (10.18%)
Aurora Cannabis (NASDAQOTH:ACBFF), another giant Canadian medical-cannabis producer, also has quite a lot of weighting in the first-ever marijuana ETF. Aurora, like Aphria, is choosing to grow mostly on an organic basis, albeit it did acquire a 40,000 square-foot facility recently to aid production. The company's pride and joy is its Aurora Sky project, which will be an 800,000-square-foot, highly automated facility when complete. It, too, should be capable of perhaps 100,000 kilograms of dried cannabis annually when fully operational.
Of the large Canadian producers, Aurora Cannabis is the only one that hasn't consistently delivered quarterly profits, mainly a result of reinvesting so heavily into Aurora Sky. The company does have an incredibly large sum of cash to work with, which is a positive, although it's diluted its investors through a number of bought-deal offerings, suppressing shareholder value in the process.
Scotts Miracle-Gro (9.23%)
If investors were looking for some form of stability in the Horizons Marijuana Life Sciences ETF, then Scotts Miracle-Gro (NYSE:SMG) is it. Scotts gets about 90% of its revenue from its traditional lawn and garden business. The remaining 10% comes from its fast-growing Hawthorne Gardening Co. subsidiary, which is catering to the medical marijuana industry.
Hawthorne, which has primary grown by acquisition, focuses its efforts on hydroponics (growth in a nutrient-rich water solvent), lighting, nutrients, and soil solutions. In other words, a company that's devoted its work to helping plants grow has moved a portion of its operations to cater to the medical cannabis industry. The good news for investors is that Scotts Miracle-Gro has been, and should remain, healthfully profitable.
GW Pharmaceuticals (8.7%)
No surprise here that the largest marijuana stock by market cap is among the largest holdings in the first-ever cannabis ETF. Perhaps the bigger surprise is just how poorly GW Pharmaceuticals' (NASDAQ:GWPH) stock has performed of late. The company is counting on success for its lead drug, Epidiolex, a cannabidiol-based oral medicine designed to treat two rare types of childhood-onset epilepsy, Dravet syndrome and Lennox-Gastaut syndrome. In phase 3 studies, Epidiolex handily met the threshold of a statistically significant reduction in seizure frequency relative to the placebo.
The pressing issue for GW Pharmaceuticals is that a rival, Zogenix, recently reported promising data for its low-dose fenfluramine hydrochloride as a treatment for Dravet syndrome. While Epidiolex and fenfluramine have never gone head-to-head, and comparisons of the two are nothing more than conjecture at this point, the 72% reduction in convulsive seizure frequency for fenfluramine was notably higher than the 39% for Epidiolex in Dravet syndrome patients. GW's recent weakness has certainly held back this first-ever marijuana ETF.
Insys Therapeutics (8.03%)
However, if you're really looking to point the finger for the Horizons Marijuana Life Sciences ETFs underperformance, place the blame squarely on Insys Therapeutics (NASDAQ:INSY). Insys' issues have been directly tied to Subsys, its sublingual medication for breakthrough cancer patients. Allegations and lawsuits suggest that Insys was improperly marketing Subsys, a synthetic opioid, for a handful of off-label uses, with up to 80% of all prescriptions heading to patients that shouldn't have taken the drug. As a result, sales of Subsys have been halved over the past two years, and Insys has been pushed from healthy quarterly profits to a quarterly loss.
On the bright side, Insys recently launched Syndros, its Food and Drug Administration-approved treatment for chemotherapy-induced nausea and vomiting and anorexia associated with AIDS. With more than $300 million in possible peak annual sales, Syndros has a chance to return Insys to profitability, as well as help investors forget about its Subsys issues.
It's tough to say what the next six months will bring for pot stock investors, but the past six months probably haven't gone the way many investors expected.