The recreational use of marijuana is still illegal on the federal level. However, nine states and Washington, D.C., have legalized it, and dozens of states allow cannabis to be used for medical purposes.
No one can predict the timing of landmark federal legislation, but it’s reasonable to expect that it will happen, given the public’s and many politicians’ overwhelming support. This means early players in legal distribution for recreation will be positioned to make a tremendous amount of money, as will their shareholders. And that could be you.
Nigam Arora made a compelling case that tobacco companies will invest heavily in marijuana. And Constellation Brands STZ, +0.34% the producer of Corona beer, spent about $4 billion to increase its stake in Canopy Growth CGC, -0.31% in April at a huge premium. Canopy grows and sells marijuana and marijuana-derived products in Canada, where recreational use is now legal.
A legal problem
So U.S. investors can purchase shares of small Canadian marijuana companies. However, there’s very little similar action for publicly traded U.S. companies.
A major stumbling block is the Investment Company Act of 1940.
“Federal law, for a 1940 Investment Act company, which is what most mutual funds and ETFs are, requires them to have a federal custody bank” in the U.S. to hold the stocks they invest in, explained Dan Ahrens, chief operating officer of AdvisorShares in Bethesda, Md.
In other words, there will be little institutional support for recreational marijuana stocks in the U.S. until it is legalized on the federal level.
Looking ahead, Ahrens believes there will “absolutely” be enough political support for the eventual national legalization.
Vice ETF
Ahrens is the portfolio manager of the AdvisorShares Vice ETF ACT, -0.01% Unlike many exchange traded funds, which passively track stock indexes, the Vice ETF is actively managed.
In an interview on Sept. 11, Ahrens explained that before establishing the Vice ETF in December, he heard from a number of people who wanted to create a marijuana or cannabis ETF.
“We had to tell them no, this would not work in the United States. There were simply not enough federally legal, listed, liquid stocks to invest in,” he said.
So the idea behind the Vice ETF is that “there is already overlap between alcohol, tobacco and cannabis, and that overlap is only going to increase,” Ahrens said. He called alcohol and tobacco stocks “recession-proof, because people will drink and smoke no matter what is going on.”
AdvisorShares Dan Ahrens, chief operating officer of AdvisorShares.
Research into new uses for marijuana by health-care providers and suppliers is another theme driving stock selection for the Vice ETF. Getting back to recreation, “there are already cannabis beers being developed,” as well as “alternate delivery systems — vapes, consumables, liquids,” he said.
Well-positioned companies
“Right now my fund invests mostly in ancillary companies and major pharmaceutical and biotech companies. They are working on non-recreational use and developing what many people think are important drugs,” Ahrens said.
Here are the top 10 holdings of the AdvisorShares Vice ETF as of the close on Sept. 11:
Company Ticker Share of fund Industry Total return - 2018 through Sept. 11 Total return - 3 years Boston Beer Co. Inc. Class A SAM, +1.14% 8.0% Alcoholic Beverages 67% 48% Turning Point Brands Inc. TPB, -6.23% 6.6% Tobacco 106% N/A AbbVie Inc. ABBV, +0.06% 5.8% Pharmaceuticals -1% 76% BJ's Restaurants Inc. BJRI, -3.46% 5.6% Restaurants 108% 69% Darden Restaurants Inc. DRI, -0.54% 5.1% Restaurants 27% 108% RCI Hospitality Holdings Inc. RICK, +3.75% 4.9% Movies/Entertainment 6% 180% MGP Ingredients Inc. MGPI, -3.23% 4.8% Agricultural Commodities/Milling 4% 420% Abbott Laboratories ABT, +0.56% 4.5% Medical Specialties 18% 64% Dave & Buster's Entertainment Inc. PLAY, +0.09% 4.4% Restaurants 3% 34% LVMH Moet Hennessy Louis Vuitton SE ADR LVMUY, +2.10% 4.3% Luxury Products 14% 105% Sources: AdvisorShares, FactSet
Ahrens called Constellation Brands (the ETF’s 11th-largest holding as of Sept. 11) a good example of the type of investment he is looking for. “Some alcohol producers have concerns about marijuana cutting into their business, while Constellation Brands, and others, are embracing it and investing in the future and present of Cannabis,” he said.
Turning Point Brands TPB, -6.23% the second-largest holding of the ETF, makes Zig Zag rolling papers. “They are involved in liquids, vapes, papers — there’s a great deal of overlap to cannabis for a company that is officially listed as a tobacco company,” Ahrens said.
When discussing large alcohol and tobacco companies in general, Ahrens said the group’s decades of experience with Washington lobbying, as well as creative marketing and promotion efforts (because of limitations on broadcast and print advertising), make it a perfect fit for the eventual wide, legal distribution of recreational marijuana.
“Philip Morris International PM, +3.36% and their affiliate company, Altria MO, +6.66% and British American Tobacco BTI, +6.01% ... have already been working on a big shift toward various types of e-cigarettes and vapes. It is very easily going to transfer and overlap into the cannabis industry” once it’s legalized federally, Ahrens said.
Those three tobacco companies are also held by the ETF.
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