As N.J. considers marijuana legalization, here’s how to invest in cannabis ahead of Nov. 3 vote

As New Jersey closes in on what could be a watershed vote to legalize recreational marijuana use, investors are taking a renewed interest in the profit potential of growers, sellers and so-called cannabis-adjacent companies.

New Jersey is one of four states whose voters will decide next month on whether to legalize marijuana for recreational use; the others are Arizona, South Dakota, and Montana. And if cannabis gets the green light in the Garden State, that would dramatically ratchet up the pressure on Pennsylvania to do the same or lose out on a tax windfall during hard fiscal times.

The surge in optimism follows months of stock market highs and lows — the pun is unavoidable — for public firms in the marijuana and CBD industries. After a supply glut earlier this year in Canada and a dearth of financing, stock prices plunged for most of the leading firms.

“The cannabis industry was in a bear market for about 25 months,” said Emily Paxhia, managing director at Poseidon Asset Management, a cannabis-focused fund with $145 million in assets. Her fund mostly bankrolls private companies, and tracks public cannabis firms, as well. “We watch very carefully,” Paxhia said.

But strong demand during the coronavirus lockdown in the United States turned that around, surprising industry veterans.

“It’s pushed things to a new normal," Paxhia said. "People are lighting up at home. They’re increasing consumption, making fewer trips out.”

For investors, the markets remains volatile, with new players popping up and others fading. Some experts, such as Dan Weiskopf, portfolio manager with New York-based Toroso Investments, say that ETFs — exchange traded funds — may be a smart choice for many investors because of their diversified holdings. Such funds hold stocks of individual companies that invest in marijuana growers, retail dispensaries, equipment, testing, delivery, marketing or related businesses such as fertilizer.

“Individual investors will face many different challenges in measuring and analyzing the leadership in this area," Weiskopf said, "so buying a basket of companies is the less risky approach than trying to pick the winning stock yourself.”

A number of factors during the pandemic helped boost cannabis-related industries. It was crucial, of course, that governors of many states deemed the trade an “essential business” to operate.

Business practices appropriate to the pandemic helped legitimize and accelerate fledgling trends helpful to consumers: Patient certification by telemedicine became common, as did home delivery by “caregivers” working for legal dispensaries. The pandemic showed that cannabis is to a degree recession-proof and reframed marijuana’s public image as less an intoxicant and more of a wellness aid.

Since February, dispensaries in Pennsylvania have sold as much marijuana as they had the previous two years combined, according to statistics released by the Pennsylvania Department of Health, which governs the state’s medical cannabis program. Other states have seen similar gains in consumer demand.

“We saw unprecedented growth through COVID,” said Victor Guadagnino Jr., of Keystone Canna Remedies, a medical marijuana dispensary chain with retail outlets in Allentown, Bethlehem and Stroudsburg. “The ‘essential business’ designation validated it overnight. That’s the silver lining that came out of the pandemic.”

As a result, Pennsylvania could soon have 600,000 to 700,000 medical marijuana patients, roughly doubling the number when the pandemic began, he estimated.

Of the four states considering legalization during this election cycle, New Jersey is arguably the most important.

The state could be the first in the highly regulated Mid-Atlantic market to legalize recreational cannabis. And approval is looking likely. More than 60% of Jersey voters consistently have told pollsters they support legalization for adult recreational use.

New Jersey’s vote may expand the market even farther, said Kacey Morrissey of Washington-based New Frontier Data, which provides analytics for global cannabis firms.

“New Jersey is extremely important because it could [prime] the Northeastern states for recreational use,” Morrissey said. She expects New Jersey voters to easily pass the ballot question.

Morrissey said New Jersey could see annual revenues approaching $2 billion in the next four years. Much of that market would be driven by consumers crossing the bridges from New York and Pennsylvania.

“There will be a ton of demand from out-of-state tourism,” she said. So “if New Jersey goes, I see Pennsylvania not far behind.”

Pa. Gov. Tom Wolf is already vocal about not missing the opportunity, though legalization has little support from Republicans who control the legislature in Harrisburg. On Wednesday Wolf tweeted: “Other states are pushing to legalize adult-use marijuana. Tell your legislator: Let’s legalize in Pennsylvania and keep those profits here, in our own backyard.”

In Pennsylvania, which is suffering from a $5 billion hole in its budget compounded by the COVID-19 pandemic, Wolf asked the legislature in August to bring him a bill for recreational legalization. He’s looking for revenues similar to those in the state of Illinois, which legalized in January and is already generating more than $10 million in taxes every month.

Wolf’s lieutenant governor, John Fetterman, is acting as spearhead on the issue, and is also a proponent of allowing homegrown crops for personal use in Pennsylvania.

Nationwide, the legal cannabis industry is growing. Recreational use is permitted in 11 states and 33 have made medical marijuana available.

The combined legal and “traditional” market for marijuana last year was estimated to be worth $89 billion nationally. Only $19 billion of that market was in-state legal sales.

Yet that amount is still greater than the $15 billion in revenue that the NFL reaped during the 2018-2019 season, said Mina Mishrikey, of Merida Capital Partners, which specializes in cannabis investments. Estimates call for $31 billion in annual legal cannabis revenues by 2024, Mishrikey said.

The legal cannabis industry is aiming to capture and convert the estimated $70 billion illicit market.

Now, the publicly traded cannabis industry appears to have bottomed out.

“It’s just starting to turn around now,” said Paxhia.

Too many companies went public prematurely, she said, and “people who jumped in and poured money into IPOs got a rough dose of reality. They all missed their targets and underperformed.”

The top four public operators in the U.S. cannabis industry include GTI (GTII.CN), Cresco Labs (CRLBF), Curaleaf (CURLF)and Trulieve (TCNFF).The first three are down roughly 30% from their highs, but fell less than the sector as a whole. Trulieve, which went public more recently, wasn’t hammered as badly.

Paxhia also draws attention to TerrAscend (TRSSF), a company with a growing presence in Pennsylvania and New Jersey whose CEO, Jason Ackerman, was the founder of grocery delivery service FreshDirect.

“It’s likely New Jersey will allow home delivery [of marijuana] and knowledge of the last mile is invaluable,” similar to delivery of groceries and other retail packages, she said.

Lindy Snider, partner at Treehouse Global Ventures in Bryn Mawr, said the bigger companies are doing well.

“You have really positive news in the sector and it’s a good time to be investing in the cannabis space,” Snider said. “Brands had to go lean during the pandemic. Like all other industries, they had to take a look at their burn rates and how they could streamline their operations to last. It’s going to show that cannabis is now like a normalized industry and subject to the same market forces as the rest of the world.”

“Ancillary” stocks, of companies that provide equipment and services but don’t actually handle the plant or extracts, have been strong performers.

Supply manufacturer Scotts Miracle-Gro (SMG), hydroponics supplier GrowGeneration (GRWG), and testing giant Thermo Fisher Scientific (TMO) make regular appearances in marijuana portfolios.

Unlike “plant-touching” growers and dispensaries, most related businesses can sell and ship their goods over state lines.

Another cannabis-adjacent company with a history of strong performance is Innovative Industrial Properties Inc. (IIPR), a real estate investment trust, which buys the property occupied by a marijuana cultivator and leases it back to the grower.

At least 10 cannabis-focused Exchange Traded Funds are available in the U.S. Marijuana ETFs run total assets under management of about $653 million, fairly small compared with other industries. These funds — baskets of companies — hold portfolios of individual companies that invest directly in marijuana growers, retail dispensaries, equipment, testing, delivery, marketing or ancillary businesses such as fertilizer.

But marijuana ETFs are not cheap: The average expense ratio, or annual fee, totals 0.72%, according to ETF.com. That’s well above, say, an index fund charging 0.10% annually.

The largest marijuana ETF by assets under management is the ETFMG Alternative Harvest ETF (symbol: MJ) with $492 million. The best performing marijuana ETF, however, was the AdvisorShares Vice ETF, which rose 10% year to date.

The most-recent ETF launched is the AdvisorShares Pure US Cannabis ETF (MSOS). The issuer, AdvisorShares, already created exchange-traded funds AdvisorShares Pure Cannabis ETF (YOLO) and AdvisorShares Vice ETF (ACT). In September, the firm launched MSOS, which concentrates solely on U.S. marijuana and hemp companies, and charges an annual fee of 0.74%.

Which of these should investors look at more closely?

Over the course of 2019, many individual stock prices fell by double digits. For example, year to date, Canopy Growth (CGC) has fallen 32%, Aurora Cannabis (ACB) has sunk 52% and Tilray (TLRY) lost 74%.

All together, these factors made marijuana one of the worst-performing sectors of 2019.

It’s safer to get exposure to these volatile stocks through an ETF, rather than trying to pick winners and losers, said Toroso’s Weiskopf.

“We are big believers in thematic ETFs for purposes of targeted growth and disruption and see ETF innovation as an important part” of investing, he said.

“But why there needs to be 10 different ways to play marijuana even surprises me."