“There are too many companies in the cannabis sector today.”
- Som Seif, President and CEO of Purpose Investments
Most cannabis investors would look at the statement above and simply consider it to be stating the obvious. Cannabis is a new, legal sector – with a multitude of commercialization opportunities. This has caused a flood of public and private companies to enter this space. There are too many cannabis companies.
The question is: armed with this information, what should investors do about it?
One company that is seeking to provide a firm answer to this question is Purpose Investments Inc., founded by CEO Som Seif. Seif is a pioneer in the ETF space who previously founded and sold Claymore Investments. He saw a problem and came up with a solution.
In an 8-minute interview, Seif explains how and why he had reached the conclusion there were too many companies in this sector. Once arriving at this perspective, his prognosis flows naturally: the cannabis industry is heading for a “massive consolidation” where the sector will become quickly divided into “winners and losers”.
Resource investors, in particular, are familiar with dealing with these winners-and-losers scenarios in the small-cap companies in which they invest. Their answer? Hold a basket of such companies.
The rationale is simple. Knowing there will be winners and losers in the future – but with considerable uncertainty on who will win and who will lose – investors buy and hold a basket of these companies. By diversifying (to spread out risk), investors hope and expect the winners in their basket to more than offset the losers.
Cannabis, however, is a new sector. This means not only lots and lots of brand-new companies to research, it also means that few investors have any significant expertise in evaluating these companies. The solution? The Marijuana Opportunities Fund (NEO: MJJ, Forum).
This is Canada’s “first actively managed marijuana ETF”. For newer investors to the cannabis space, MJJ not only provides them with an already-assembled basket of cannabis companies, these are all companies that have been carefully screened and selected by wealth management professionals.
That’s the basic rationale as to why cannabis investors may find this marijuana ETF an attractive addition to their portfolio. Scratch the surface, however, and several additional reasons bubble up.
Reducing volatility
Another symptom of a brand-new sector with strong growth potential and a flood of new entrants is above-average volatility. After several years of extremely anomalous low volatility in most markets, volatility has returned. This means amplified swings in the valuations of these companies – peaks and valleys that may test the resolve of many investors. A marijuana fund implies significantly lower volatility, something that may be especially attractive right now.
At the same time, such volatility is seen as an opportunity for fund managers. Again the logic is simple. Let the professionals trade the swings with these individual companies while fund-holders simply reap the gains.
Ability to short the market
Capitalizing on volatility often means more than merely trading swings (on the long side). Where the valuation of a particular company seems especially stretched, the opportunity to short that stock presents itself.
Many retail investors are reluctant to short stocks given the potential for greatly amplified losses. This is especially true for a new sector with high volatility. MJJ is a safer vehicle to provide exposure to such opportunities.
Ground-floor IPO opportunities
Unless accredited, most retail investors cannot gain access to the new IPO’s (and private placements) that are regularly arising in the cannabis sector. MJJ is also an investment vehicle for these ground-floor opportunities.
Why else would investors be interested in this particular fund? To start with, low management fees (only 0.75%). When MJJ wins, you win.
Beyond this, as with many wealth management teams, Purpose Investments takes a nimble approach to asset allocation. Specifically, when market conditions are unfavorable, MJJ is ready/willing to move to cash – to be ready to maximize opportunities when sentiment is stronger.
Cannabis is a new sector with a multitude of commercial niches opening up, and decades of opportunities ahead for interested investors. Some investors may find managing their own investments to be a fun (and hopefully profitable) pastime. However, for serious cannabis investors, the Marijuana Opportunities Fund may be the vehicle that you are looking for to help maximize the profitability of your cannabis portfolio.
www.purposeinvest.com
FULL DISCLOSURE: Purpose Investments Inc. is a paid client of Stockhouse Publishing.