To be perfectly blunt, there’s something in the air...and it’s not just pollen.
As we approach April 20, a date that’s become something like a holiday for cannabis enthusiasts, there’s little argument that legalized marijuana is spreading like, well, a weed.
Uruguay was the first country in the world to legalize cannabis for recreational use, in 2013, followed by Canada, which in 2018 became the world’s first developed nation to legalize recreational cannabis, having approved it for medicinal use back in 2001.
In the United States, while it’s not legal at the federal level, as of the end of 2018 only four states have deemed cannabis to be illegal, with the majority of states approving it (as well as cannabidiol or “CBD,” the nonpsychoactive component of cannabis) for medicinal use. And 11 states as of this writing have approved cannabis for both medicinal and recreational use. In June 2018 the FDA also approved its very first cannabis-derived drug—Epidiolex—a CBD oral solution used to treat certain seizures associated with epilepsy.
Source: Elysse Feigenblatt/Leafly, as of 12/18/2018
So it should come as little surprise to investors that cannabis is also finding its way into public equities. In fact, MSCI ESG Research has identified close to 100 publicly traded companies around the globe with some sort of tie to cannabis. Which raises a fair question for some investors: How do I know if there’s pot in my portfolio? To help answer that question, let’s look at some of the public companies with cannabis involvement that investors might see in familiar, broad-based equity indexes.
Cannabis stocks: chronic growth or just smoke and mirrors?
Many public cannabis companies are domiciled in Canada, which means investors using the MSCI EAFE Index as their benchmark will naturally have less cannabis exposure. Moreover, these companies tend to be more involved in recreational cannabis production rather than production for medicinal or other pharmaceutical purposes. The majority of the rest of the companies are based in the United States and tend to be more focused on cannabis’s medicinal uses or are still in the pharmaceutical R&D phase, though there are a few that are also involved with recreational cannabis.
Source: MSCI ESG Research, as of 4/12/2019
Largest cannabis stocks by index weight
Joint efforts: Mainstream companies are beginning to invest in cannabis
As small as these cannabis companies’ index weight is, it’s worth noting a growing trend: Other entities are looking to prevent cannabis companies from bogarting all the action. For example, in November 2018, in the largest deal made in the marijuana space to date, Constellation Brands, a New York State–based producer of beer, wine, and spirits, invested $4 billion in Canopy Growth. And in another example of buying high, in December 2018 the tobacco manufacturer Altria (the parent company of Phillip Morris) rolled a $1.8 billion equity investment into Cronos Group. That amounts to a 45% stake in the company.
Source: MSCI ESG Research, as of 4/12/2019. Some companies are involved in more than one category.
The bottom line
While cannabis stocks seem to be all over the headlines, very few names associated with the industry are in familiar broad-market indexes. And even when they are, they tend to be quite small in terms of market capitalization weight. Using any cannabis involvement as our measure, today we see a combined weight for these companies of less than 0.10% in the MSCI ACWI ex US Index and less than 0.50% in the Russell 3000 Index.
However, if the M&A trend persists, it’s possible larger companies will continue to enter the cannabis market and the number of cannabis stocks will rise. This may increase many passive investors’ exposure to what might be fair to call the stock market’s equivalent of secondhand smoke.
Companies mentioned are for informational purposes only and should not be considered a recommendation to buy, sell, or hold any security. The companies identified and described do not represent all companies purchased, sold, or recommended for client accounts. It should not be assumed that an investment in the companies listed was or will be profitable. The companies listed above were selected for discussion based on objective, non-performance-based criteria. These companies discussed comprise all the members of the Russell 3000® Index and MSCI ACWI ex US Index that directly, or indirectly through ownership, produce or sell medicinal or recreational marijuana products or are engaged in the research or development of cannabis-derived pharmaceutical products.