Are you interested in investing in marijuana stocks? Do you prefer the diversification of exchange-traded funds (ETFs)? If you answered "yes" to both questions, I have good news and bad news for you.
The good news is that there are a couple of marijuana-focused ETFs available. The Horizons Marijuana Life Sciences Index ETF (HMMJ 3.97%) tracks Arcview's North American Marijuana Index. The ETFMG Alternative Harvest ETF (MJ 5.27%) tracks the Prime Alternative Harvest Index.
What's the bad news? Both of these marijuana ETFs stank last year. The Horizons ETF plunged nearly 31% in 2018, while the ETFMG ETF fell more than 23%.
There's also some great news, though, if you're willing to invest in individual marijuana stocks rather than ETFs: Several marijuana stocks handily outperformed both the Horizons and ETFMG ETFs. I think there are three such stocks that trounced these ETFs and are likely to do it again in 2019: Cronos Group (CRON 4.99%), CV Sciences (CVSI 6.45%), and MariMed (MRMD 0.00%).
Why these stocks outperformed the ETFs
CV Sciences was the biggest winner of these three. Actually, it was the top-performing marijuana stock of 2018. CV Sciences' stock skyrocketed a whopping 598%.
The company really isn't a marijuana stock in the strict use of the term. CV Sciences develops hemp-based cannabidiol (CBD) products. Both hemp and marijuana come from the cannabis plant, but hemp contains very low levels of psychoactive compound THC.
CV Sciences turned in an exceptional performance last year the old-fashioned way. It generated record-high revenue with strong earnings growth. The company also launched a new line of CBD-infused gummies.
MariMed's share price soared 371% last year. The company provides advisory services to the U.S. cannabis industry but is jumping more into direct operations now by buying its customers. Like CV Sciences, MariMed posted impressive revenue growth in 2018.
Cronos Group stock jumped 34%. The big story for the company was its major deal with Altria. The tobacco giant invested $1.8 billion to buy a 45% stake in Cronos and has an option to increase its position to gain majority control of the Canadian marijuana producer.
Can CV Sciences, MariMed, and Cronos Group beat the top two marijuana ETFs again in 2019? I think so.
For one thing, I haven't been a fan of these ETFs for several reasons. They have high fees that put them at an immediate disadvantage to buying individual stocks. They're heavily weighted with marijuana stocks that already have very high valuations. My biggest knock against them, though, is that they aren't invested much in the U.S., which is the biggest marijuana market of all.
This last point is a key factor in why I think CV Sciences and MariMed will likely outperform the marijuana ETFs for a second consecutive year. CV Sciences should benefit from U.S. legalization of hemp. Cannabis market research company Brightfield Group thinks this legalization is a game-changer and could propel the U.S. hemp-based CBD market to $22 billion by 2022.
MariMed will probably be a winner from U.S. hemp legalization as well. It has invested in hemp-based CBD company GenCanna. But MariMed also should enjoy growth from the expanding medical marijuana market in the United States. The company already operates in six states and could move into more states in the near future.
That leaves Cronos Group. The company hasn't officially announced any plans to enter the U.S. hemp-based CBD market, although that doesn't necessarily mean it won't do so. Cronos Group is well positioned to prosper as the Canadian recreational marijuana market takes off in 2019, particularly with the anticipated finalization of regulations later in the year for cannabis edibles and concentrates. I suspect that Cronos' connection with Altria could begin to pay off this year also.
My prediction is that the Horizons and ETFMG marijuana ETFs will have a better year in 2019 than they did in 2018. However, I still think picking individual stocks is the better path for success.
And while these three big winners of last year will probably beat the ETFs, I think there are other marijuana stocks that could be even better bets. All of them are positioned to profit from the U.S. market.
If you're serious about capitalizing on the marijuana boom, pay close attention to what happens in the good old USA. That's something the top marijuana ETFs simply aren't doing very much.
Check out the latest Cronos Group earnings call transcripts.