This has been an unforgettable year for Wall Street and investors. We've watched the CBOE Volatility Index climb to its highest reading of all time, observed the quickest bear market decline (of at least 30%) in history, and seen the quickest rally from a bear market bottom to fresh highs on record.
While volatility is always present in the market, the coronavirus disease 2019 (COVID-19) pandemic has created unprecedented uncertainty -- and it's this uncertainty that's led to Wall Street's wild vacillations.
For long-term investors, these crazy swings are opportunities to scoop up quality companies on the cheap. But they've also brought short-term traders and speculators out of the woodwork. Online investing app Robinhood has attracted millions of members, many of whom are young and/or novice investors.
Robinhood investors are unable to invest in this huge growth opportunity
Although these young investors have shown a penchant for penny stocks and a handful of awful companies, they've also taken quite a liking to high-growth industries. Some of the most popular holdings for Robinhood members include cloud stocks and electric vehicle manufacturers. But little do Robinhood investors know that they're completely missing out on the best part of one of the fastest-growing industries on the planet: marijuana.
Over the next decade, cannabis is expected to be a premier growth industry. After registering just shy of $11 billion in global legal sales in 2018, Wall Street analysts have pegged that sales figure at anywhere from $50 billion to $200 billion by 2030. The range is so broad because there is no comparable precedent for a legalized marijuana industry, and therefore no true idea how much illicit retail is going on behind the scenes that could be moved into legalized channels.
Robinhood investors do have access to cannabis. Unfortunately, they've drawn the short end of the stick.
U.S. pot stocks are a no-go for Robinhood members
You see, Robinhood places no restrictions on its members when it comes to buying and selling penny stocks (companies under $5 a share and/or with very small market caps). The one catch is that they must be listed on the New York Stock Exchange (NYSE) or Nasdaq stock exchange. Companies that are listed on the over-the-counter (OTC) exchange can't be bought on the Robinhood platform.
A quick look at Robinhood's leaderboard (i.e., the most-held stocks on the platform) shows that five Canadian licensed producers have made the top 70 holdings: Aurora Cannabis (ACB 1.21%), Canopy Growth (CGC 1.08%), Cronos Group (CRON 1.33%), Aphria, and Tilray. Although these companies have a physical presence in the U.S. hemp or cannabidiol industry, they aren't retailing any tetrahydrocannabinol (THC)-containing pot products on U.S. soil. Therefore, they're not violating the U.S. government's Schedule I classification on marijuana and can be listed on the NYSE or Nasdaq, assuming they meet each exchange's continued listing standards.
By comparison, U.S. multistate operators (MSO) that are cultivating, processing, distributing, and retailing marijuana are doing so in violation of federal law. Although the federal government is maintaining a hands-off approach and allowing legalized states to regulate their own pot industries, all direct marijuana players in the U.S. are currently barred from uplisting to the NYSE or Nasdaq -- and will remain so, absent a change to marijuana's scheduling at the federal level. This means Robinhood investors can't buy U.S.-focused pot stocks.
Robinhood investors are left with only poor choices
Given a choice between the U.S. and Canada, the U.S. is a no-brainer buy for investors. Yet, for Robinhood members, their only acceptable choice at the moment is to invest in Canadian licensed producers, which aren't particularly appealing.
Aurora Cannabis is, by far, the most popular of the group, but has lost more than 90% of its value since mid-March 2019, through this past weekend. Aurora did name a new CEO a little over two weeks ago. The company has also been willingly slashing costs in an effort to backpedal its way into profitability. However, it's written down close to $3 billion Canadian this calendar year alone. It has also frequently pushed back the goalpost for achieving positive adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA).
As for Canopy Growth and Cronos Group, the two most cash-rich marijuana stocks in North America, the bleeding simply hasn't come close to stopping. Canopy's relatively new CEO, David Klein, has significantly reduced share-based compensation and halted acquisition activity. But losses for the biggest marijuana stock by market cap haven't come down fast enough. If not for yet another equity investment from Constellation Brands in early May, Canopy's cash pile would have eroded by CA$3 billion in under two years.
As for Cronos Group, it's had virtually no luck with its derivative-focused product lineup. The launch of these higher-margin products was delayed in Canada until mid-December, and regulatory-based supply issues have added to the problem. Further, Cronos' dreams of becoming a vape product superstar have stalled due to health concerns about vaping.
There simply aren't any smart ways for Robinhood investors to take advantage of the fast-growing marijuana industry.
Solution? Consider opening a second brokerage account
While Robinhood's commission-free trades, lack of account minimum balance, and gifts of free stock for new users can be alluring, the inability to buy OTC stocks is a killer if you're trying to buy into high-quality marijuana stocks. The best solution might just be to open a separate account at another brokerage that does allow OTC transactions.
Canadian pot stocks are losing money hand over fist, and they've been constrained by the regulatory miscues of Health Canada and provincial regulators. Meanwhile, a number of U.S. MSOs are already profitable or nearing the turn to recurring profitability.
For example, why would anyone willingly invest in Aurora Cannabis when they could purchase the fast-growing Trulieve Cannabis (TCNNF -2.23%)? Trulieve is the most nominally profitable marijuana stock in North America. It's opened 60 retail locations, 58 of which are in Florida. Trulieve's laser focus has allowed it to gobble up roughly half of the Sunshine State's medical marijuana market share, all while keeping its own marketing expenses relatively low. In just the first six months of 2020, Trulieve has generated almost $90 million in operating income, without fair-value adjustments or one-time benefits skewing the results.
You could also buy Green Thumb Industries (GTBIF -1.40%), which is generating close to two-thirds of its revenue from high-margin derivatives (e.g., vapes, beverages, and edibles). Green Thumb has opened four dozen retail locations around the country, but has enough licenses to double its presence to 96 dispensaries in a dozen states. The company's presence in Illinois and Nevada should prove especially fruitful.
It's a shame that Robinhood's millions of members are missing out on this high-growth opportunity.