A money manager explains why buying pick-and-shovel’ stocks is the best way to play with the green rush
Barbara Corbellini Duarte/Business Insider
High-flying and volatile cannabis stocks have caught the attention of both the Main Street and Wall Street this year, especially as Canada and the Michigan have recently legalized the recreational use of marijuana.
While traders are embracing the opportunities of the “green rush,” they should be aware of the high volatility of pot stocks, said Ken Mahoney, CEO of the New-York based Mahoney Asset Management.
“When there is a lot of excitement about it, I get worried because the valuations are stretched,” Mahoney said. “People don’t do enough homework before they invest.”
Mahoney, who offers clients retirement solutions, says his experience shows smaller investors always end up in the wrong direction when a new concept comes to the market because there’s always a high level of uncertainty.
“It’s hard to find the ultimate winner,” he said. “It’s hard to be the stock picker.”
So, instead of buying individual cannabis stocks such as Tilray, Aphria, Cronos Group, Aurora Cannabis and Canopy Growth, Mahoney recommends using a “pick-and-shovel” strategy, which involves investing in the underlying technology needed to produce cannabis, rather than in the final product.
According to Mahoney, most weed stocks are new to the market and don’t have a record of revenues and profits to support their “outrageous valuations.” However, old “pick-and-shovel” companies, which provide solutions, such as fertilizing, real estate, and packaging for marijuana producers, already have a well-established business and can capitalize on the opportunities that cannabis brings.
Below Mahoney gives four stock picks and explains why he likes them:
The first marijuana-related real-estate firm to be publicly traded, Innovative Industrial Properties (IIPR) provides real-estate solutions and capital for the medical-use cannabis industry. With big bank and direct equity investments hard to come by due to strong federal laws and regulations, IIPRs sale and leaseback option is becoming increasing popular in the industry. It currently runs over 10 properties and has more than half a dozen growers in operation.
A manufacturing firm with a 150-year history. Scotts Miracle-Gro offers fertilizers, plant foods, seeds, soils and pest controls. SMG purchased of one of the top hydroponic companies in the United States, Sunlight Supply, for $450 million began to develop its presence in the marijuana market.
Coupled with the recent law changes in Canada and some US states legalizing marijuana, its hydroponics business, which is the process of growing any plant, including marijuana, has been improving.
SMG has more than 1,000 retail locations spread across major legal marijuana states in the US, so any soil, fertilizer, pest control, or even simple gardening products bought will most likely fall under the SMG brand.
A British bio-pharmaceutical company recognized for its use of cannabinoid-based drugs for medical treatments. In 2010, one of its products was approved and used in the UK to help treat multiple sclerosis. But more recently (June 2018), here in the United States, it was the first drug-maker to be approved for a cannabis derived drug by the US Food and Drug Administration.
The parent company to Kush Supply Co, a sales and distribution outfit that has become the United States’ largest distributor of packaging, supplies, and vaporizer products in the marijuana industry.
KushCo doesn’t deal with cannabis directly, and instead provides nearly everything else. From packaging to compliance and marketing to gas canisters it handles everything behind the scenes, so its clients can focus on growing the best marijuana.
KushCo holds first mover advantage and pricing power in this niche market, but like most of these stocks we are relying on the fact marijuana sales will skyrocket following less legislation and increased popularity. It also must be noted, KushCo is ticking along at a significantly cheaper price than other stocks mentioned in this piece.