Penny Pot Stocks To: Buy! Hold! Sell!

Pot is legal in over 35 jurisdictions globally, including in many states in the US and all across Canada. And while there are grey areas in some jurisdictions (e.g. Federal versus State versus Municipal) as to what “legal” means, Cannabis, Marijuana, Hemp definitely offers great investment opportunity.

But how should one venture into pot stocks? Well, we’ve got you covered. Read on!

Playing potluck with your portfolio

Before we take a deep dive into potential Cannabis candidates for a portfolio, let us take a step back and see what other “traditional” investment opportunities are available to portfolio builders.

To do that, we’ll look at some traditional building blocks as represented by popular ETFs/Indices:

  1. SPDR S&P 500 ETF Trust (SPY): You could have purchased the entire S&P Index through SPY
  2. SPDR Gold Trust (GLD): If you are a gold bug, adding GLD may have been a good idea
  3. Energy Select Sector SPDR (XLE): Were you expecting an energy resurgence, then XLE could have been a good bet
  4. Financial Select Sector SPDR Fund (XLF): Investors who thought the worst was over for the financial sector may have found XLF a good place to park money into
  5. Health Care SPDR (XLV): And if you wanted to jump in on the healthcare wave, XLV would have been a great place to hide

Over the past 4-months (120-days), adding any one of these traditional pillars to your portfolio would have netted you 13.70%, 1.92%, 14.05%, 14.05%, and 0.40% respectively. Why 4-months? Well, because I wanted to illustrate how they all “bounced back” after the great market decline at the end of 2018.

Over a longer-term horizon (250-days), only SPY and GLD would have been accretive to your portfolio, with the other three pillars delivering negative returns.

But look how ETF Managers TR/TIERRA XP Latin AME (MJ) performed. MJ is a market-cap-weighted basket of companies from across the world that are engaged in legally cultivating, producing, marketing or distributing cannabis, cannabinoids or tobacco products. The 120-day (29.04%) and 250-day (29.68%) returns to speak for themselves.

If you wanted to play potluck with your portfolio, you’d have been way more satisfied had you added a slice of pot to your plate!


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Building your portfolio

Like many other sectors, Cannabis offers investors several different options to get some pot action.

  • Direct: By investing in companies that cultivate, grow and dispense cannabis or cannabinoid products
  • Indirect: By building a portfolio of stocks that play an ancillary role – like delivery, construction, consulting and advisory – within the industry

We’ll take a look at a few ways that you could build a portfolio of cannabis and related stocks.

1) Direct – The high to medium-priced stocks

There’s a good chance that price favors performance – but not always! So, if you are a believer that a higher priced stock is likely to be rewarded, in the long-run, by investors such as yourself, then you have this list of names to consider.

At the time of writing, these names were trading in the price range of $6 to $160. Clearly, the “price favors performance” mantra does not fit perfectly to these names – with $16 CRON outperforming $160 GWPH (166% Vs. 19%) over the 250-day analysis period. However, before you put your money to work in any of these names, you need to do your homework. Some reasons for the outperformance could be:

  • New partnerships
  • Mergers and acquisitions
  • Large institutional money flows (in or out)

Milestone events like the above could cause wild price swings – especially in an industry like Cannabis that’s probably in its infancy (compared to Financials, Energy or Healthcare).

2) Direct – The penny stocks

If you are unsure of how you feel about Cannabis as part of your portfolio, then you may wish to “start small”. This list of names represents sticks that, in my definition (“below $5 price range”) are penny stocks.

Notice that we are using a relatively shorter timeframe for this analysis – 120-days. That’s because, by their very definition, penny stocks are not inclined to perform well as long-term investments. Though some of these names may do well over a longer-term time horizon, the volatility in these low-priced stocks makes them ideal for a quick trade.

Additionally, because these names trade OTC, you may find that there are risks (counter-party risks, lack of transparency, and large bid-ask spreads) associated with trades.

3) Indirect – Stocks not directly involved in growing, or with multi-lines of business

If you are looking for exposure to the Cannabis sector in general, but don’t want to tie your portfolio to direct grower exposure, then you can use these indirect names as a building block.

Some of these names (like SMG) are tied to the fate of the growers because they supply inputs like fertilizers for crops. Others (like SVVTF) provide Cannabis infrastructure to growers and researchers in the industry. Still others (like TRTC) operate in multiple segments of the industry, including real estate, construction and dispensing. This latter type of player could potentially offer much broader diversification to the portfolio than some of the single-lines-of-business companies.

4) Indirect – ETFs

For investors who might not like a DIY approach to building a Cannabis portfolio, the following list of Cannabis/Cannabinoid-focused ETFs might be worth considering.

Depending on which of these you might fancy, you could get direct exposure to the Cannabis sector, or (like with ACT) to a broader basket of “sin stocks” that also include Cannabis/Marijuana stocks. Be mindful about the associated MERs when doing the math to ascertain if these are cost-effective to add to your portfolio.


Market-cap bets

Some portfolio builders have an affinity for building portfolios based on market-cap weighted stock picks. Depending on your preference, you might wish to add stocks on whether they ate Large, Mid or Small-cap stocks.

This list of vital stats will help you discern whether your pick fits your strategy. The 52-week parameters should give you an idea of how much price-volatility each stock has seen over the past year. The %-Return value represents the price change (in percent) over a 250-day period. Take special note of trading volumes and average 3-month volume. These should give you an indication of how liquid/illiquid your pick might be.


In the mid-cap space, that many investors like to play in, I would tend to favor NBEV over dual-listed CannTrust (TRST.TO on the Toronto stock exchange and CNTTF on the OTC). Though much smaller in terms of market cap, NBEV is cheaper on every metric – P/E, P/B, and P/S.

Additionally, over the past year, NBEV has proved to be a better bet than CannTrust. It’s current upward price momentum also looks very promising to technical investors – unlike the down-trend in TRST.TO’s price.

Long-shot portfolio bets

Since pot is a relative newcomer to the investment arena, it also has its share of “up and comers” within its ranks. If you want to take a bet on some of them, here are a few names to consider:

  • Driven Deliveries, Inc. (DRVD) – That’s an up-and-coming cannabis delivery company. Management is building out its delivery capabilities through partnerships and alliances that could potentially support product deliveries in the Bay Area, Central California, Sacramento, the OC, and Los Angeles areas.
  • MassRoots, Inc. (MSRT) – Provider of technology platforms focused on the U.S. medical cannabis community. It also enables suppliers to connect with a network of users and marketers through Apps available on the Google, Amazon and Apple platform
  • Applied DNA Sciences, Inc. (APDN) – Among other plant science technologies, it offers support for seed-to-sale tracking of legally grown cannabis and hemp.

Remember, these are speculative buys, so don’t assign a huge weight in your portfolios for them. Additionally, since these companies and their technologies are relatively unproven, you’d do well

The author does not have an investment in stock discussed in this article.

With a Bachelor's degree in Commerce (with Accounting/Finance as a major), a diploma in Technology Management and Entrepreneurship, and Microsoft’s IT Infrastructure Library (ITIL) certification (including from the London Chamber of Commerce and Industry, and the University of New Brunswick in Canada), Monty brings a diverse repertoire of analytical and writing skills to the team. Monty’s vast international work experience, in Audit, Tax, Project Management, IT and Management Consulting, including with companies like Price Waterhouse, Peat Marwick and KPMG, adds a unique perspective to the content he produces.