Canada’s first phase of marijuana legalization for recreational use took effect October 17, 2018. That boosted legal marijuana production and sales—and the appeal of marijuana stocks for investors.

Since then, investors have generally come to understand that there’s significant risks in marijuana stocks.

For instance, cannabis returns for investors have almost all dropped sharply since early 2019. Oversupply combined with major bottlenecks in getting products to consumers are the big reasons. COVID-19 restrictions for retail stores have also helped to slow sale, although Canada’s still-thriving black market will undoubtedly have a much longer impact. In addition, legal cannabis sellers are still working to pinpoint consumer tastes in this new market.

All of this has cast into doubt the industry’s already-optimistic projections for revenue and profit growth.

Meanwhile, “Cannabis 2.0” is now here. That’s the legalization of a second wave of products, such as edibles, extracts and topicals, following Canada’s initial October 2018 legalization. These 2.0 products also include cannabis-infused chocolates, cookies, soft chews, mints, tea and vapes.

The speculative appeal of Canadian marijuana stocks continues to attract investors looking for a “ground-floor opportunity.” However, the pioneers in an industry are not always the ones who survive.

There are also low barriers to entry for new competitors—and those barriers are just getting lower with more and more producers getting Federal government approval to grow crops outdoors.

That introduces a new, cheaper supply of marijuana that will compete with established indoor producers who have invested billions in greenhouses and other indoor facilities.

The long-term outlook for top growers is still positive. But in the near term, an emerging issue for producers, and their investors, is securing funds to keep money-losing operations going. Available debt financing will likely be on unfavourable terms and for many producers, selling shares at today’s low prices would be dilutive to current investors.

All in all, we suspect that few of today’s cannabis stocks will turn into profitable companies, and

some may wind up worth even less than today.

Note, too, that strong investor interest in any new area also attracts penny stock spammers—and marijuana stocks are no exception. A significant rebound in cannabis stocks could bring about a new wave of these penny promotions. That could lead investors to buy overvalued stocks—but even worse, it can see them fall victim to wildly-speculative “Pot o’ Gold” penny stock promotions. We say more on that in the Investor Bonus section below.

Despite, the keen investor interest in marijuana stocks, we have yet to come across any we are prepared to recommend as buys for conservative investors.

Nonetheless, here’s a look at three of the most widely followed cannabis stocks:

Canopy Growth Corp.

Canopy Growth Corp., symbol WEED on Toronto (www.canopygrowth.com), began trading on TSX Venture Exchange under the name Tweed Marijuana on April 3, 2014. In September 2015, it changed its name to Canopy Growth Corp. The shares graduated to the regular TSX Exchange on July 26, 2016.

Canopy is a North American cannabis and consumer-packaged goods (CPG) company. It has a focus on premium and mainstream cannabis brands including Doja, 7ACRES, Tweed, and Deep Space.

In November 2017, Constellation Brands (symbol STZ on New York), one of the world’s largest beer, wine, and spirits producers, acquired a 9.9% stake in Canopy Growth Corp. for $190 million.

Constellation’s stake in Canopy is now at 33.2%, and it holds warrants that would let it increase that to approximately 50.2%. However, Constellation plans to abandon those warrants.

Canopy continues to restructure in the highly competitive cannabis market.

This includes selling off the company’s retail cannabis business to reduce organizational complexity; the closure of several facilities to leave cultivation to two, purpose-built sites; and the outsourcing of production of edibles, vapes and beverages, which will help accelerate the time it takes to get items on shelves.

Canopy has also ceased funding its 72%-held BioSteel Sports Nutrition unit. BioSteel has filed for bankruptcy protection under the Companies Creditors’ Arrangement Act (CCAA).

BioSteel’s business was a significant drag on Canopy Growth’s profitability and cash flow. The likely sale of the business will be part of Canopy’s efforts to simplify its business and reduce cash burn. Meanwhile, the company still holds cash of $571.2 million.

The stock is a speculative buy for aggressive investors who want exposure to the marijuana industry.

Cronos Group Inc.

Cronos Group Inc., symbol CRON on Toronto (www.cronosgroup.com), reports through two segments: U.S. and the Rest of World.

The U.S. segment manufactures, markets and distributes U.S. hemp-derived supplements and cosmetic products through e-commerce, retail and hospitality partner channels in the U.S. under the brands Lord Jones, Happy Dance and PEACE+.

The Rest of World segment is involved in the cultivation, manufacture, and marketing of cannabis and cannabis-derived products for the medical and adult-use markets.

In Canada, Cronos operates two wholly owned license holders: Peace Naturals Project Inc., which has production facilities near Stayner, Ontario, and Thanos Holdings Ltd., known as Cronos Fermentation, which has a production facility in Winnipeg, Manitoba.

In Israel, the company operates with the approved certifications required for the cultivation, production and marketing of dried flower, pre-rolls and cannabis oils in the Israeli medical market.

Cronos is currently undergoing a restructuring. In the third quarter of 2022, following the decision to begin a phased exit of the wholesale beauty category in the U.S. business in the second quarter of 2022, the company continued to reduce operating expenses in the U.S. to better align the business structure with the new strategy to focus on adult-use product formats in the direct-to-consumer channel. Cronos also plans to phase out its Peace Naturals facility in Stayner, Ontario.

The stock recently jumped to as high as $3.23 on reports that it was reviewing unsolicited indications of interest from potential buyers.

The stock has since moved back down, even though Cronos is reportedly working with a financial adviser; U.S. cannabis company Curaleaf Holdings is also reportedly among the potential buyers.

Currently, Cronos is backed by tobacco giant Altria Group (symbol MO on New York) which owns 41% of its stock after investing $1.8 billion in the company in 2018.

Cronos Group is a speculative buy for aggressive investors who want exposure to the marijuana industry.

Organigram Holdings

Organigram Holdings, symbol OGI on Toronto (www.orgainigram.ca), is a Canadian producer of cannabis plant cuttings, dried flower, blends, pre-rolls and cannabis derivative-based products to approved retailers and wholesalers for adult recreational use. The company is also authorized to distribute cannabis for medical use.

Organigram conducts its operations at its facilities located in Moncton, New Brunswick, Winnipeg, Manitoba and Lac-Supérieur, Quebec. The company has expanded its main facility in Moncton over time to create additional production capabilities by strategically acquiring land and buildings adjacent to the main facility, including to add capacity for the manufacture of derivative product forms.

The company recently expanded its global footprint to the U.K. by entering into a supply agreement to provide dried medical cannabis flower to retailer 4C LABS. Under the terms of the agreement, Organigram expects to supply approximately 600 kilograms of high-quality, indoor-grown dried flower product to 4C LABS within the first year of the deal. It will also grant 4C LABS strain exclusivity within the geographical boundaries of the U.K. & Channel Islands for as long as minimum purchase commitments are satisfied. Medical cannabis has been legal in the U.K. since 2018.

Organigram is a speculative buy for aggressive investors who want exposure to the marijuana industry.

It remains difficult to say which marijuana growers will prosper and which will not. More certain is that overall demand for cannabis—for both medicinal and recreational use—will continue to expand. One way for investors to cut risk is to look for firms that will benefit from industry growth no matter which producers thrive.

Here are two ETFs that aim to benefit from the potential profitability of the cannabis industry.

For investors who want exposure to marijuana markets, these ETFs partially cut the risk of uncertain long-term outlooks for cannabis producers. Still, each fund is a hold only for highly aggressive investors betting on the continued momentum of marijuana growers.

HORIZONS MARIJUANA LIFE SCIENCES ETF (Toronto symbol HMMJ) invests in North American firms that are legally involved in the cannabis industry.

The fund tracks the North American Marijuana Index. U.S. companies make up 41% of the portfolio, followed by Canada, 39%, and other countries, 19%. The ETF invests in cannabis growers as well as bio- pharmaceutical companies and support firms such as lighting technology and fertilizer companies.

Despite its 21 different stocks, the ETF’s holdings are still highly concentrated in growers: they make up 36% of its assets.

The ETF’s top five holdings are Jazz Pharmaceuticals (Ireland), Tilray Brands (U.S.); Cronos Group (Canada); Scotts Miracle-Gro (U.S.), and Innovative Industrial Properties (U.S.)

The ETF launched in April 2017. It charges a relatively high MER of 0.86%, but has a reasonable size. It pays intermittent quarterly distributions. The last payment was in $0.08571 a share in April 2023.

The fund has dropped 60.4% over the last year, while the broad-based S&P/TSX Composite Index is down 14.5%.

The Horizons Marijuana Life Sciences ETF is okay to hold only for highly aggressive investors willing to accept the risks of investing in cannabis and cannabis-related stocks.

ETFMG ALTERNATIVE HARVEST ETF (New York symbol MJ) invests in companies that are engaged in the legal production and sale of cannabis for medical or recreational purposes.

The fund invests globally, although the bulk of its assets are held in Canada and the U.S. Industry exposure is mainly to Pharmaceuticals, Tobacco and Biotechnology.

The ETF holds 33 stocks. The top holdings include ETFMG U.S. Alternative Harvest ETF, Tilray, SNDL Inc., Canopy Growth and Cronos Group.

The ETF started up in December 2015. Its MER is a high 0.75%. It pays a fluctuating dividend, for a current yield of 3.2%.

The ETFMG Alternative Harvest ETF is okay to hold only for highly aggressive investors willing to accept the risks of investing in cannabis and cannabis-related stocks.

Which marijuana producers’ stocks will move up on speculative momentum, and which will crash? That’s very difficult to predict—given the industry’s low barriers to entry, and uncertain future regulation.

We think a far better way to profit is with firms that will profit no matter which producers thrive. At the same time, they already have a solid base of other business, sound prospects—and the added appeal of a sustainable dividend.

Here are four such stocks:

Scotts Miracle-Gro Company

Scotts Miracle-Gro Company, symbol SMG on New York ( www.scottsmiraclegrow.com) manufactures, markets, and sells consumer lawn and garden products worldwide.

In 2013, the company’s CEO Jim Hagedorn decided to branch out into offering products for marijuana growers.

Since then, Scotts has made numerous acquisitions of leading companies providing specialty fertilizers, “grow lighting” and other supplies for hydroponics—that’s the indoor method of growing cannabis favoured by U.S. producers.

Right now, hydroponics (through Scotts’ Hawthorne division) represents roughly 29% of sales, but their importance should rise as more U.S. states legalize marijuana. Growing pressure from more states should speed nation-wide legalization at the U.S. federal government level.

As well, Scotts has acquired Sunlight Supply Inc., the top distributor of hydroponics products, for $450 million. Scotts will now serve 1,800 hydroponic retailer customers in the U.S. Sunlight has nine distribution facilities across North America.

Scotts yields a high 5.0%.

Scotts Miracle-Gro Company is a buy for aggressive investors.

Altria Group

Altria Group, symbol MO on New York (www.altria.com) is the parent company of Philip Morris USA, John Middleton and Philip Morris Capital Corp. The company operates in two main segments: Cigarettes (86% of operating profits) include Marlboro, Benson & Hedges, Merit and Virginia Slims; and smokeless products (14%).

Altria is well-placed to expand in to marijuana distribution and marketing. This could include pre-rolled marijuana joints, or replacing nicotine liquid in e-cigarettes with tetrahydrocannabinol (THC) liquid, the main chemical component found in marijuana.

The market for marijuana presents a big growth opportunity for tobacco firms. They continue to face declining demand for traditional tobacco products in many of their core markets. As a result, they’re now investing in smoking alternatives such as electronic cigarettes, although growing regulatory control makes unclear their growth potential.

Altria already operates in the tightly regulated cigarette industry, and could easily adapt to a similarly regulated marijuana industry. Meanwhile, the company owns 41.1% of Canada’s Cronos Group (see above).

The stock yields a high 9.4%.

Altria Group is a worthwhile hold for most investor portfolios.

Loblaw Cos.

Loblaw Cos., symbol L on Toronto (www.loblaw.ca) operates 1,104 supermarkets across Canada. But most important for the marijuana industry, it also operates 1,338 Shoppers Drug Mart pharmacies across the country.

In January 2019, Shoppers began selling medical cannabis online to patients in Ontario.

The company’s stores do not carry cannabis. Instead, prescription-holding patients who register with Shoppers can purchase cannabis from one of the chain’s licensed producers. They then send the medication to the patient’s home or doctor’s office.

Shoppers is now transferring its cannabis distribution business to biopharmaceutical company Avicanna Inc. (Toronto symbol AVCN) and that firm’s MyMedi.ca online platform. It has not yet said how much it will receive.

Dispensing medical cannabis was not as profitable as Shoppers anticipated, particularly as its stores cannot carry these drugs, so this move will cut its costs.

Loblaw Cos. is a buy.

PepsiCo

PepsiCo, symbol PEP on Nasdaq (www.pepsico.com) is the world’s second-largest soft-drink maker after Coca-Cola. Its other brands include Frito-Lay snack foods, Gatorade sports drinks, Tropicana fruit juices and Quaker Oats cereals.

PepsiCo continues to launch new drinks and snacks with less sugar, salt and fat. Those “guilt- free” products now account for roughly 45% of the company’s total sales.

We’re stretching the link between PepsiCo and marijuana here—but of special interest to smokers is the company’s range of crave-quenching Frito-Lay snack foods—including its “Munchies” brand.

At the same time, PepsiCo is an industry leader and a sound investment. The stock yields 2.8%.

PepsiCo is a worthwhile hold.

While the marijuana industry now has a number of established producers, in the early days of de- criminalization we saw many highly speculative “pot-of-gold” penny stock promotions. These typically arise in new industries, and they persist long after companies like Canopy Growth and Aurora Cannabis emerge.

We advise staying out of speculative stock promotions of Canadian marijuana businesses or anything else. They attract the wrong kind of people. Stock promotion is a take-the-money-and- run type of business. Most successful entrepreneurs value their reputations, and want to build a profitable, sustainable business that can pay off for investors. So, they generally go in to some other line of work, and stay out of stock promotion, which is a good thing.

These days, it’s faster and easier than ever to launch a stock promotion, thanks to the Internet. One recent “penny pot” cannabis stock scam almost seems like an MBA-style case study on how to launch one of these frauds online.

Techniques used in POG emails:

• One group of emails seems to be misdirected personal communications—one friend tipping off another to a good thing in the stock
• Another group carries the names and logos of legitimate news sources like Bloomberg News and the Fox Business Network, and/or legitimate financial companies such as TD Ameritrade and
• Many carry identical or near-identical messages that tout the stock, but appear to come from a variety of
• Many of these emails carry blocks of random text printed in light grey or off-white. This is a spammer technique for outwitting anti-spam By adding random text to the emails, the spammers lower the proportion of spam-like words and symbols, hoping to stop anti-spam software or search engines from detecting the spam and consigning it to the junk email folder.

Spam relies on impulse buying

When you read spam emails, you have to wonder who could be taken in by such patently false deception. In fact, two kinds of people are especially vulnerable: those who don’t read much or well, and those who invest on impulse. To avoid being taken in, it pays to read more, and to think before you invest.

Above all, stick to our three-part Successful Investor strategy:

• Invest mainly in well-established companies;
• Spread your money out across most if not all of the five main economic sectors (Manufacturing & Industry; Resources & Commodities; the Consumer sector; Finance; and Utilities);
• Downplay or avoid stocks in the broker/media

The third element in our strategy is crucial to avoiding stock scams. These scams focus on companies that have nothing to recommend them, other than a connection with some trend or the development of an industry that is getting a lot of media attention. It takes a lot more than that to create a profitable business or investment. But if you let the media limelight direct your investment decisions, you increase your risk of blundering into a promotional stock such as a POG.