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Top 5 REIT ETFs Allow Investors To Gain Expsoure To Real Estate With Limited Risks

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Real estate exchange traded funds (ETFs) allow investors to buy shares and receive dividend distributions based on their investment. This provides a unique angle to real estate investing, which often uses leverage, whereby a buyer borrows against most of a property’s value to gain income from the property, even though the buyer only put part of the money into the property.

A real estate ETF, on the other hand, invests in several real estate companies simultaneously, versus the individual investor buying and betting on one property. Because the investor does not have to borrow money to buy the real estate, there is no debt to repay.

Investopedia has selected the following real estate ETFs as the top five ETFs that allow investors to get into real estate without having to be a landlord or a partner in an investment group. The top five real estate ETFs are based on assets under management as of July 17, 2017.

They are listed from largest to smallest. The investment approaches of each fund were evaluated so investors can compare styles and results.

1. Vanguard REIT ETF (VNQ)

Source: Google Finance Yahoo Finance MSN Money

VNQ’s main goal is high income. Investors can also experience growth in the value of their investment, but that is secondary. VNQ tracks an index that measures the performance of real estate investment trusts (REITs).

The REITs’ specific stocks are part of the MSCI U.S. REIT Index. The holdings get weighted in a manner similar to the index’s weightings.

This ETF is by far the largest real ETF, with over $30 billion in assets, and one of the cheapest, with an expense ratio of 0.12%, according to Morningstar.

VNQ tracks a broad index that captures a large portion of the U.S. real estate market, according to ETF.com. The market cap allocations reflect those of ETF.com’s neutral benchmark. It only deviates in the persistent sector bias away from specialized REITs in favor of commercial ones.

VNQ offers massive assets and is extremely cheap to hold, according to ETF.com. Its portfolio management has brought the cost of owning VNQ even lower than its stated expense ratio.

The only downside is that Vanguard discloses holdings monthly rather than daily. This, however, is true for most low-turnover funds, and not important to many investors.

VNQ trades high volumes daily with penny-wide spreads. Distributions from he fund get taxed as ordinary income, as with peer REIT ETFs.

ETF.com gives VNQ an “Analyst Pick” in a crowded field for solid coverage at very low all-in costs.

• Avg. Volume: 4,206,246
• Net Assets: $63.32 billion
• PE Ratio (TTM): 7.48
• Yield: 4.43%
• YTD Return: 2.55%
• Expense Ratio (net): 0.12%

2. iShares U.S. Real Estate ETF (IYR)

Source: Google Finance Yahoo Finance MSN Money

Investors in IYR seek results similar to shares in the Dow Jones U.S. Real Estate Index. IYR invests mostly in REITs and tries to keep 90% of its assets in securities that are in the index. Companies represented by those securities can be large, mid or small cap.

The percentage of assets in any particular size company relies on its underlying index. Money managers can adjust the mix to more closely reflect the benchmark’s performance.

IYR, one of the first U.S. real estate ETFs, remains a stalwart of the space, according to ETF.com. The fund tracks a broad real estate index and captures a large portion of the real estate space.

IYR holds about 100 companies, covering all the big names. Its performance and overall portfolio characteristics align well with ETF.com’s neutral benchmark.

IYR’s big asset base facilitates abundant liquidity — it is among the most traded real estate ETFs. The fund is, however, expensive to hold compared to peers that track similar indexes. Distributions from the fund are taxed as ordinary income.

IYR’s coverage of U.S. real estate in an ETF is tough to beat, according to ETF.com.

• Avg. Volume: 6,903,919
• Net Assets: $4.78 billion
• PE Ratio (TTM): 6.81
• Yield: 4.06%
• YTD Return: 5.61%
• Expense Ratio (net): 0.44%

3. iShares Cohen & Steers REIT ETF (ICF)

Source: Google Finance Yahoo Finance MSN Money

iShares Cohen & Steers seeks results similar to the Cohen & Steers Realty Majors Index. The index comprises REITs, in which the fund invests at least 90% of its assets, or in depositary receipts that represent the REITs. The fund seeks companies that can be acquired or that can acquire other companies as part of the real estate sector’s consolidation.

ICF is designed to capture the top end of the real estate market, offering the returns of the 30 largest players in the space, according to ETF.com. The concentrated, large-cap-oriented portfolio provides the lion’s share of its assets in just 10 names.

The limited scope of the fund also produces notable sub-sector tilts compared to ETF.com’s broad real estate benchmark. ICF is a big, well-run ETF with an extensive history and limited structural risks or tax surprises.

The fund’s expense ratio is on the high side, but its tight tracking and deep liquidity deliver reasonable costs. ICF overall makes good on its promise of access to the “realty majors,” even if it does not capture the complete flavor of the U.S real estate market.

• Avg. Volume: 214,214
• Net Assets: $3.25 billion
• PE Ratio (TTM): 12.87
• Yield: 3.85%
• YTD Return: 3.07%
• Expense Ratio (net): 0.35%

4. Schwab U.S. REIT ETF (SCHH)

Source: Google Finance Yahoo Finance MSN Money

SCHH mainly invests in REITs from the Dow Jones U.S. Select REIT Index, but can also invest in assets not included in the index. The REITs that are part of the index assigns weights similar to the index’s weightings.

The ETF tracks a market-cap-weighted index of EITs, excluding mortgage REITs and companies involved in real estate finance.

The Schwab US REIT ETF is among the strongest entries in the real estate ETF lineup and is a direct challenger to RWR, the real estate ETF behemoth, according to ETF.com. SCHH tracks the same index as RWR, but does so at a fraction of the holding cost.

With outstanding liquidity, the fund provides a low cost for a broad and diversified array of U.S. REITs. SCHH’s solid “Fit” score from ETF.com reflects its holdings, which mirror that of the U.S. real estate market, but with a bias to the core real estate sub-sectors of residential and commercial properties. For diverse real estate exposure at a low cost, SCHH provides one of the best options, particularly for long-term investors, according to ETF.com.

• Avg. Volume: 517,073
• Net Assets: $3.29 billion
• PE Ratio (TTM): N/A
• Yield: 2.64%
• YTD Return: -1.19%
• Expense Ratio (net): 0.07%

5. SPDR Dow Jones REIT ETF (RWR)

Source: Google Finance Yahoo Finance MSN Money

SPDR Dow Jones REIT ETF, on the largest real estate ETFs, uses the Dow Jones U.S. Select REIT Index as its benchmark. RWR money managers invest in securities whose valuations are closely tied to each company’s actual real estate holdings, and avoid those that are valued based on considerations other than their real estate.

The SPDR Dow Jones REIT ETF tracks a market cap weighted index of companies involved in the operation and ownership of residential, commercial, healthcare and other real estate.

RWR is one of the oldest real estate ETFs, according to ETF.com. Since 2001, it has offered investors a liquid and well managed vehicle to invest in a diverse, market-cap-weighted group of U.S. REITs.

The fund tilts away from “specialized REITs,” including everything from railway REITs and hospital REITs, and instead overweights the “quintessential” real estate sub-sectors, such as residential and commercial REITs. Hence, it could appeal to investors seeking a “pure play.”

RWR’s strategy has been a hit, drawing billions in assets, and in turn providing deep liquidity. Its only liability is the expense ratio, which is several times higher than that of its main competitor, SCHH, which tracks the same Dow Jones index.

While RWR offers solid coverage in a liquid and large package, cheaper options do exist for long-term holders.

• Avg. Volume: 184,200
• Net Assets: $3.03 billion
• PE Ratio (TTM): N/A
• Yield: 3.98%
• YTD Return: 1.12%
• Expense Ratio (net): 0.25%

The bottom line on REIT ETFs is that investors do not need to raise large down payments to get into real estate, thanks to ETFs. The ones listed above offer an opportunity to participate in the real estate market with no debt, rent collections, down payments, or property marketing.

The REITs hold numerous properties, and the funds hold numerous REITs, so investors can be protected from losses on account of any one property failure.

Featured image from Shutterstock.

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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3.9 stars on average, based on 8 rated postsLester Coleman is a veteran business journalist based in the United States. He has covered the payments industry for several years and is available for writing assignments.




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5 Top Yielding Stocks That Outperform The S&P 1500

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Stocks jump

Barron’s columnist Mike Hulburt has identified five high yielding stocks that have strong growth potential, using Dow Theory Forecasts, a longtime newsletter that focuses on high yielding stocks.

In summarizing the five stocks – Washington Prime Group (WPG), Consolidated Communications Holdings (CNSL), Seagate Technology PLC (STX), Hersha Hospitality Trust (HT) and Macy’s (M), Hulburt explores the rationale behind Dow Theory Forecasts. He cited a new study from the Dow Theory Forecasts newsletter on a portfolio of stocks with the highest dividend yields that have outperformed the S&P 1500 since 1990 by an average annualized 1.3 percentage points.

Many stocks in the portfolio lost money over the years while their dividends got cut or eliminated, Hulburt noted. General Electric, for example, recently cut its dividend in half as its stock lost nearly 40% in a year the S&P 1500 index gained 19%. The portfolio nonetheless improved sufficiently with its other stocks to more than compensate for the losses and outperform the market as a whole.

The Dow Theory Forecasts built a hypothetical high dividend performing portfolio to optimize the chance of owning a stock with a dividend that would soon be cut. This was accomplished by investing only in S&P 1500 stocks with the highest yields, yields beyond 8%. Only 24 stocks – 1.6% of the total – posted yields at that level, according to FactSet, a financial data and software provider. Since 1994, only nine stocks posted this performance at any given time.

A portfolio with high yielding stocks is not typically conservative, Hulburt observed. During the financial crisis, stocks at the October 2007 high yielded more than 8%. By the March 2009 low, they had fallen by 63.1% on average, according to FactSet. The Dow Jones Industrial Average, by comparison, lost 53.8%.

The conventional wisdom holds that high dividend paying stocks are more conservative than growth stocks paying no dividends. This is the case for higher quality dividend paying stocks, but not for those with the top dividend yields, Hulburt noted.

The Dow Theory Forecasts does not recommend automatically investing in a stock on the basis of having a high dividend yield. It recommends taking into account factors including the portion of earning paid out in dividends and balance sheet strength.

The Dow Theory Forecasts’ Stock Rating System

Dow Theory Forecasts’ proprietary Quadrix stock-rating system uses more than 90 variables to score stocks in six categories: momentum – defined as recent operating performance; quality; value; financial strength; earnings estimates; and performance, defined as stock price action, according to the company’s website.

For these six categories and the overall score, the system scores stocks on a percentile basis, with zero the lowest and 100 the highest. A score of 95, for example, signifies the stock outperforms 95% of the approximately 5,000 U.S. stocks in the system’s universe.

Stocks cannot be reduced to numerical equations, however, and a numbers-based ranking system cannot replace individual company analysis. But a Quadrix type of system can provide a solid starting point for building portfolios.

Since the system only uses quantifiable factors, it identifies stocks achieving superior results. Similarly, because the system is not influenced by emotions that can cloud the investor’s judgment, it provides a way to track current portfolio holdings.

After the system has winnowed stocks from the vast universe, a team of Dow Theory Forecasts research analysts examine individual company performance.

Following are the five stocks that have the highest yields in the S&P 1500, and which also are recommended by at least one of the top-performing newsletters that Hulburt tracks.

Washington Prime Group (WPG)

Washington Prime Group (WPG), a mall and shopping center REIT, had a 1.2% yield, 35.7 forward price-per-earnings ratio and a 33% loss in its 52-week share price movement through Dec. 6, 2017, according to Thomson Reuters as reported by Investopedia.

For the fiscal year ended Dec. 31, 2017, net income attributable to common shareholders was $183 million, or $0.98 per diluted share, compared to $53.1 million, or $0.29 per diluted share, in the prior year. The increase in net income relates primarily to a $124.8 million gain on disposition of assets recognized during 2017 and a $56 million increase in gains on debt extinguishment in 2017, partially offset by a $45 million increase in non-cash impairment charges in 2017 and lower net revenues in 2017.

Additionally, fiscal year 2016 results include merger, restructuring and transaction costs of $29.6 million, and there were no such costs in 2017.

Washington Prime Group, near 1-year performance.

Consolidated Communications Holdings (CNSL)

Consolidated Communications Holdings (CNSL), a broadband and business communications provider, had a 12.3% yield, 38.4 forward price-per-earnings ratio and a 4% loss in its 52-week share price movement through Dec. 6, 2017, according to Thomson Reuters as reported by Investopedia.

For the full year 2017, the company’s pro forma operating revenue totaled $1,460.6 million, down 6.8% from fiscal 2016. Approximately 44% of the revenue decline is attributed to the divestiture of the equipment services business and the Iowa ILEC in 2016. The balance of the year-over-year decline is primarily due to the continued erosion of legacy voice services and access revenues as well as the step down in transition funding in CAF II support.

Consolidated Communications Holdings, near 1-year performance.

Seagate Technology PLC (STX)

Seagate Technology PLC (STX), a provider of digital storage solutions, had a 6.% yield, 9.44 forward price-per-earnings ratio and a 3% loss in its 52-week share price movement through Dec. 6, 2017, according to Thomson Reuters as reported by Investopedia.

Seagate Technology PLC reported revenue of approximately $2.9 billion for the second quarter of 2018, and GAAP and non-GAAP gross margin of approximately 30%. The company expects to report record exabyte shipments of approximately 88 exabytes, reflecting drive shipments of approximately 40 million and record average capacity per drive of 2.2 terabytes.

The strength in the company’s revenue and gross margin for the quarter was driven primarily by better-than-expected demand for the company’s HDD mass-storage solutions portfolio and operational execution.

Seagate Technology PLC, near 1-year performance.

Hersha Hospitality Trust (HT)

Hersha Hospitality Trust (HT), a provider of high quality hotels in urban gateway markets and coastal destinations, had a 6.3% yield, -217.8 forward price-per-earnings ratio and a 17% loss in its 52-week share price movement through Dec. 6, 2017, according to Thomson Reuters as reported by Investopedia.

Hersha Hospitality Trust reported net income applicable to common shareholders was $75.7 million, or $1.79 per diluted common share, in 2017, compared to net income applicable to common shareholders of $95.6 million, or $2.18 per diluted common share, in 2016.

The decrease in full year 2017 net income and net income per diluted common share was mainly due to a decline in gains on the dispositions of hotel assets.

Hersha Hospitality Trust, near 1-year performance.

Macy’s (M)

Macy’s sales in fiscal 2017 totaled $24.837 billion, down 3.7% from total sales of $25.778 billion in fiscal 2016. Comparable sales on an owned basis fell 2.2% in fiscal 2017, while comparable sales on an owned plus licensed basis dropped by 1.9%. Total sales for fiscal 2017 reflect a 53rd week, whereas comparable sales are on the same 52-week basis as fiscal 2016.

Macy’s, Inc.’s 2017 operating income totaled $1.807 billion, or 7.3% of sales, compared to operating income of $1.315 billion, or 5.1 of sales in fiscal 2016. Operating income for fiscal 2017 totaled $2.098 billion, or 8.4% of sales, excluding $186 million of restructuring and other costs, and $105 million of non-cash retirement plan settlement costs.

Macy’s is strategically investing to accelerate the rollout of near-term growth initiatives impacting stores, technology and merchandising. The company has also created an employee incentive program to improve engagement with associates at every level of the organization.

Macy’s Inc., near 1-year performance.

Other Strategies To Consider

Hulburt noted there are other investment strategies to consider.

The Investment Quality Trends, edited by Kelley Wright, offers another investment approach to identify risk adjusted performance over the trailing 20- and 30-year time periods monitored.

Wright suggests stocks with the highest “relative dividend yields.” A stock’s relative yield is the way its current yield stacks up against its range of past yields. If the underlying company meets certain criteria for financial strength, Wright recommends it when the yield reaches the high end of its range.

Featured image courtesy of Shutterstock.

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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3.9 stars on average, based on 8 rated postsLester Coleman is a veteran business journalist based in the United States. He has covered the payments industry for several years and is available for writing assignments.




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Saudi Arabia’s Futuristic City and How We Can Benefit from It

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The Saudi Arabian Crown Prince Mohammed bin Salman announced plans to build a new city called ‘NEOM’, with an investment of about half a trillion dollars. This is one of the many steps being taken by the Prince to reduce the Kingdom’s dependency on oil. Let’s know more about this project and see if we can benefit from this.

Key observations

  1. Saudi Arabia announced building a futuristic city, called NEOM
  2. This is part of the Vision 2030 plan of the Crown Prince
  3. If successful, this project can wean away Saudi Arabia’s oil dependence
  4. We can trade this turnaround in Saudi Arabia through an ETF

What does the name NEOM stand for?

Though NEOM sounds like a name taken from the latest sci-fi movie, in reality, it is formed by a mix of Latin and Arabian languages.

According to Al Arabiya, the first three letters of the name, ‘NEO’ means ‘new’ in Latin and the letter ‘M’ is an abbreviation for ‘Mostaqbal’, which means ‘future’ in Arabic.

Where will it be located and how big is it going to be?

NEOM will connect to Egypt on one side and Jordan on the other, making it the first private zone that is expected to span in three countries.

The mega city will be built over an area of 10,230 square miles, making it 33 times bigger than New York City.

What does the city plan to achieve?

“This place is not for conventional people or conventional companies,” Prince Mohammed told an audience of investors gathered in Riyadh. “This will be a place for the dreamers of the world,” reported The Washington Post.

It will entirely be powered by renewable energy, have driverless cars, be drone friendly, with a lot of robotics being used for various activities.

“Robots,” said Marc Raibert, the CEO of Boston Dynamics, to the conference crowd, “could perform a variety of functions, covering areas such as security, logistics, home deliveries and even looking after the elderly and infirm,” in NEOM, reported The Washington Times.

Through this project, the Crown Prince aims to provide direction to the younger generation of Saudi Arabia and keep them away from the restlessness building in the region.

“Seventy per cent of the Saudis are younger than 30. Honestly, we won’t waste 30 years of our life combating extremist thoughts. We will destroy them now and immediately,” said Prince Mohammed, reports news.com.au.

Currently, the public sector is the major employer of the Saudi’s, which eats up about 50% of the nation’s total expenditure. However, the Vision 2030 plan aims to shrink it to only 20% and this will need a large private partnership. NEON is a step in that direction.

The new city is being modeled on the lines of Dubai, a duty-free zone. If all goes according to the plan, the mega city is expected to earn a GDP of $100 billion by 2030. In 2016, the oil-rich nation had a GDP of $646.4 billion.

Therefore, NEON, if successful, will be a major source of revenue for Saudi Arabia. The project will be spearheaded by former Alcoa boss Klaus Kleinfeld.

What are the reservations of the Western investors?

Though the dream project of the Crown Prince has huge aspirations, the western world will be closely looking at the execution because the previous projects have not been very successful.

The King Abdullah Economic City in Rabigh, which was built to house about 2 million people, hardly has 5,000 permanent residents, according to the Capital Economics report. The Kingdom ranks 94th out of 190 nations in the World Bank’s ranking in ease of doing business. Its ranking is way lower at 158, in trading across borders. Hence, for this project to be successful, Saudi Arabia will have to make a lot of changes to become business friendly.

Though the Crown Prince has promised that NEON will operate independently, without any interference from the “existing governmental framework”, investors will want to see it being implemented.

After all, it was only last month that the Saudi Arabia allowed women to drive, the last nation in the world to do so.

The Crown Prince, however, has promised that the oil-rich nation will be shifting to a more moderate version of Islam. If he follows his words with actions, then maybe he has a winner in his hands.

With all the technology being touted, will digital currencies also find a place in it?

This is just a thought, that if the city is being planned for dreamers, wouldn’t it be nice that instead of using the age-old fiat currencies, Saudi Arabia leads by example and allows only cryptocurrencies to be used in NEOM.

How can we benefit from this news?

As traders, we look for an opportunity in every news that we read. Though a long-term prospect, but a good one nonetheless.

The Tadawul All Share Index (TASI) of Saudi Arabia mirrors the performance of crude oil and rightly so. After all, the Kingdom gets a Lion’s share of its revenues from oil. Therefore, while most stock markets around the world are way above their 2007-2008 highs, Saudi Arabian stock markets are struggling.

Currently, the TASI is about 40% below its 2014 highs, when crude oil was ruling above $100 per barrel.

However, we believe that the bottom is in place for crude oil and it is likely to rally in 2018. Also, if the Crown Prince can follow up this announcement with some concrete action, the index should recover. Therefore, we can put a small portion of our portfolio into an ETF which has a significant exposure to Saudi Arabia.

KSA iShares MSCI Saudi Arabia Capped ETF offers us an opportunity to access the growth in the Saudi Arabian market.

Since its launch, the ETF has largely been range bound between $20 and $27. Currently, it is falling towards its critical support of $24. The ETF has not broken below this level in 2017. Therefore, we can buy KSA around $24 levels, once it shows signs of stabilization.

If the ETF breaks out and closes above the range, its next target is $34. We can keep an initial stop loss of $19. Our risk to reward ratio is 1:2.

However, this is a long-term investment and a contrarian bet. We are trying to buy a possible future turnaround of a nation, which currently is struggling with the impact of low crude oil prices.

Risks to our assumption

Our trade is based on two important assumptions. One, crude oil prices will move higher next year and second, the Crown Prince will implement his Vision 2030 plan.

However, NEOM needs huge investment. If crude oil prices plunge, then Saudi Arabia will struggle to fund this project. Additionally, private investors will also shun it. As a result, the project will fall into a limbo, hurting our investments.

The geopolitical tension in the region can pose a challenge for successful completion and implementation of this project.

Featured image courtesy of Shutterstock.

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.7 stars on average, based on 9 rated postsRakesh Upadhyay is a Technical Analyst and Portfolio Consultant for The Summit Group. He has more than a decade of experience as a private trader. His philosophy is to use technical analysis for momentum trading and fundamental analysis for long-term positions. Rakesh likes to keep himself fit by lifting weights and considers himself to be a spiritual person.




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Going Green: An Investor’s Guide to Cannabis Stocks

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The war on marijuana is slowly coming to an end, and don’t investors know it. Very few industries have captured the imagination of Wall Street and Main Street quite like cannabis. With legalization sweeping the continent, many investors believe they are on the cusp of a generational opportunity that cuts across the medical, consumer goods and lifestyle industries.

The past 18 months have featured several watershed moments for the cannabis industry. The most profound moment came on election day, when seven U.S. states legalized recreational marijuana. North of the border, the Canadian government recently announced it will fully legalize recreational weed on July 1, 2018, some 17 years after it sanctioned medical marijuana.

These seismic shifts in public policy have left marijuana stocks seeing green, leading to an outpour of support in the mainstream investment community. But before investors get high off marijuana stocks, it’s critical to get educated about the industry. This will help separate fact from fiction in a sector brimming with more confidence than its fundamentals say it should support at the moment.

Legalization: Where We Stand

Seven states legalized marijuana in some form during the November 8 election. California, Maine, Massachusetts and Nevada voted in favor of recreational weed, while Arkansas, Florida and North Dakota backed legalizing medical marijuana.

From an investment perspective, much of the excitement emanates from the four states that legalized recreational cannabis. California is widely regarded as the proxy for the marijuana industry. If cannabis can succeed here, it can succeed anywhere. 

Colorado has also given investors a good indication of how cannabis reform can generate growth. The sale of recreational marijuana topped $1.6 billion in 2016. That translates into $200 million in tax revenue for the state.[1] 

Though legalization has been a resounding success in Colorado, the outcome is only a fraction of what California can achieve. For starters, California is eight times bigger, and if it were its own country, it would be the world’s sixth largest economy. California’s path from legalization to business generation will have a direct impact on the pot debate across the country.

The state has already vowed to fight a recent federal crackdown on recreational use, with an unusual alliance of government officials and the cannabis industry quickly taking shape. That’s because state lawmakers realize that marijuana is big business and a potential boon to the local economy. The November referendum also convinced state lawmakers that a huge swathe of the population was in full support of legalization.

Other States to Watch

Investors concerned about the federal ban on cannabis should take solace in the fact that the legalization debate is heating up across the country. In addition to the eight states that have fully legalized recreational cannabis, seven others are debating its future. The legalization debate is germinating in Delaware, Rhode Island, New Jersey, Vermont, Missouri, New Mexico, Kentucky and Texas, a sign they could be next headed to the polls.

Legalization was barely struck down in Arizona last November, with 51.3% of state residents voting against Proposition 205, a statute that would have permitted recreational use.

Source: Business Insider. States Where Marijuana Is Legalized.

Canada

There’s just as much excitement about marijuana in Canada, which is expected to fully legalize recreational use of the plant in the not-too-distant future. In early April, the federal government filed an Act to Amend the Controlled Drugs and Substances Act with the legislation officially introduced two days later. Justin Trudeau’s government is expected to implement the legislation by July 2018.[2]

Although Canada became one of the first countries to legalize medicinal marijuana back in 2001, the nation’s marijuana industry is only worth about $100 million (keep in mind, Canada is one-tenth the size of the U.S. in terms of population and GDP).

Industry players are now awaiting provincial legislation on who will be allowed to sell recreational cannabis. To date, 40 marijuana licenses to grow the plan have been granted by Health Canada. Most of these companies are already sanctioned to sell marijuana to patients via mail-order system.  

Marijuana Industry Growth and Future Potential

Perhaps no other industry has languished from pent-up demand more than marijuana. In the United States, the plant has been outlawed at the federal level since 1937. That’s 80 years of pent-up demand being met by the black market. During this period, there were few investment opportunities up until the recent growth of medical marijuana companies.

In just one year, marijuana has gone from an obscure and esoteric industry to a multi-billion-dollar enterprise that has resulted in the very first exchange-traded fund (ETF) being issued. The Horizons Medical Marijuana Life Sciences ETF (HMMJ) began trading on the Toronto Stock Exchange in April, ushering a new era for marijuana investments.

According to Arcview Market Research, revenues from legal marijuana sales reached $6.7 billion in 2016, an increase of 30% from 2015. Sales should rise at a CAGR of 25% through 2021 to reach $20.2 billion.[3] All this, and only around half of U.S. states have legalized marijuana to some degree. Analysts say that only broadband internet and cable television had a bigger growth trajectory than cannabis. 

In Canada, legalized recreational weed could ignite a nearly $9 billion industry, eclipsing the combined sale of beer, wine and spirits, according to Deloitte. An estimated 600,000 kilograms (more than 1.3 million pounds) of weed will need to be produced to meet the expected demand. That’s far more than the country’s existing licensed producers are capable of growing for medicinal uses.

Clearly, there’s plenty of reason to be bullish on marijuana. The industry is already drawing parallels to the dot-com era, which provided value investors with a rare opportunity to generate enormous wealth in an extremely short period.

How to Invest in Marijuana

In terms of growth, very few industries can compare to cannabis. Like other industries, the leading marijuana companies can be bought and sold as stocks on the open market. In North America, these stocks can be found on the Nasdaq, Toronto Stock Exchange, TSX Venture Exchange and U.S. Over-the-Counter (OTC) market. Marijuana stocks traded Over-The-Counter contain the following symbol: OTCMKTS.

OTC is a decentralized market where investors can trade with one another through email, telephone and other electronic means. In an OTC environment, the dealer acts as the market maker by quoting prices at which they are willing to buy or sell a particular stock. An OTC trade can be carried out without others being aware of the price at which the transaction was made.[4]

Investors who wish to access OTC securities must open an account with a broker that allows Over-The-Counter trading. Since OTC securities are unlisted, there is no central exchange governing the market. This essentially means that all OTC trades must be placed through market makers, a type of broker-dealer firm that competes for customer orders. Typically, OTC securities can be traded on either a discount brokerage or full-service brokerage, including online trading accounts.

Just about any type of pharmaceutical or marijuana stock can trade on the OTC market. OTC provides access to companies ranging from large-cap conglomerates to small and micro-cap growth companies. Since most marijuana stocks are still in the early-stage or developmental phase, they typically do not qualify for the OTCQX Venture Market, which is the home of OTC stocks that are generally considered to be higher quality investments.

Companies listed in the OTCQB exchange are current in their reporting to a major regulator and have greater information availability to investors. Companies that are listed under the Venture Exchange have a green checkmark on the official OTC website indicating their information is verified. “Verified” securities are those whose profile has been confirmed by a representative of the OTCQB within the last six months. A growing number of marijuana companies have already made their way to the OTCQB.

It should also be noted that although investing in OTC stocks is more accessible than ever before, this avenue is considered riskier than conventional exchanges. That’s because many of the companies on the unlisted exchanges are very small, making them prone to wild fluctuations and added volatility. These characteristics define most marijuana stocks regardless of the exchange in which they are listed.

Investors trading marijuana stocks Over-The-Counter or through a conventional exchange should generally avoid companies with very little information. These companies may be extremely illiquid, thereby adding unnecessary risk to your portfolio.[5]

The Marijuana Index

The Marijuana Index is one of the easiest ways for investors to keep track of North America’s most prominent cannabis companies. The index and its subcomponents track the leading stocks operating in the legal cannabis industry in the United States and Canada. Naturally, the index is divided into two country sub-indexes: the U.S. Marijuana Index and the Canadian Marijuana Index. Each company tracked is assigned to either index, depending on the location of their primary business operations.

All three indexes began trading January 2, 2015, and were given an inception value of 100.00 points. The Marijuana Index is equal-weighted, which means each stock is granted the same importance as others in the basket. This is also the case for the U.S. and Canadian sub-indexes. The indexes are rebalanced on a quarterly basis on the last day of March, June, September and December.

As of Oct. 25, 2017, there were 311 companies listed in the Marijuana Stock Universe.

The U.S. Marijuana Index is an equal-weighted benchmark of the country’s top-20 cannabis companies. These companies, and their associated symbol, are presented below:

Name Symbol Market Cap
Terra Tech Corp TRTC 120.96m
Surna Inc SRNA 19.53m
Solis Tek Inc SLTK 42.03m
MariMed Inc MRMD 60.43m
Marapharm Ventures Inc MDM:CNX 85.39m
MCIG Inc MCIG 55.76m
Kush Bottles Inc KSHB 108.87m
Innovative Industrial Properties Inc. IIPR 68.40m
GW Pharmaceuticals Plc GWPH 2.62b
GrowGeneration Corp GRWG 25.83m
Golden Leaf Holdings Ltd GLH:CNX 62.82m
CV Sciences Inc. CVSI 19.31m
CannaRoyalty Corp CRZ:CNX 123.75m
Cannabics Pharmaceuticals Inc CNBX 79.01m
Cannabis Sativa Inc CBDS 55.60m
The Canadian Bioceutical Corporation BCC:CNX 111.98m
Axim Biotechnologies Inc AXIM 323.83m

The Canadian Marijuana Index is a gauge of ten of the top-twelve marijuana stocks traded in Canada. This list includes:

Name Symbol Market Cap
Canopy Growth Corporation WEED:CA 2.23b
CannTrust Holdings Inc. TRST:CNX 393.49m
The Hydropothecary Corporation THCX:CA 158.72m
Tetra Bio-Pharma Inc. TBP:CA 77.01m
OrganiGram Holdings Inc OGI:CA 306.57m
Namaste Technologies Inc N:CNX 40.65m
Cronos Group Inc. MJN:CA 445.70m
Maricann Group Inc. MARI:CNX 101.31m
MedReleaf Corp. LEAF:CA 1.04b
Newstrike Resources Ltd. HIP:CA 128.55m
Supreme Pharmaceuticals Inc. FIRE:CA 271.94m
Emerald Health Therapeutics Inc. EMH:CA 137.03m
Emblem Corp EMC:CA 118.86m
CanniMed Therapeutics Inc. CMED:CA 262.08m
Cannabis Wheaton Income Corp. CBW:CA 205.06m
Aphria Inc. APH:CA 958.33m
Aurora Cannabis Inc. ACB:CA 1.09b
Abcann Global Corporation ABCN:CA 110.59m

An Introduction to Marijuana Industries

The marijuana industry is more diverse than it appears at the surface. Although weed growers continue to receive most of the headlines, the industry features a large cross-section of businesses that span nearly a dozen sectors. In the following, we introduce investors to 11 industries operating within the broader marijuana sector (source: The Marijuana Index).

Agricultural Technology: The Agricultural Technology industry includes companies that contribute to the production and cultivation of marijuana by providing technologies, equipment and supplies to grower operations. Companies: Scotts Miracle-Gro Company (SMG), Zerez Holdings (ZRZH), Solis Tek Inc. (SLTK)

Pharmaceutical/Biotechnology: The Pharmaceutical/Biotechnology industry accounts for businesses focused on the research and development of pharmaceutical drugs and products involving cannabinoids. This industry represents the largest share of the U.S. marijuana market. Companies: GW Pharmaceuticals Plc (GHPH), Insys Therapeutics Inc. (INSY), Axim Biotechnologies Inc. (AXIM).

Consumption Devices: The Consumption Devices industry includes companies involved in developing and selling personal consumption devices, such as inhalers, for consumers of cannabis. Companies: Namaste Technologies Inc. (N:CNX), Wildflower Marijuana Inc. (SUN:CNX), Wildflower Marijuana Inc. (WLDFF).

Cultivation and Retail: Cultivation and Retail includes companies that grow and sell marijuana plants and related products. In Canada, this industry is dominated by licensed producers. Companies: Canopy Growth Corporation (WEED:CA), Aurora Cannabis Inc. (ACB:CA), Cronos Group Inc. (APHQF).

Hemp Products: The Hemp Products industry is primarily concerned with the production and sale of hemp and related products. Hemp is a member of the same plant species as cannabis, but has a lower concentration of THG and a higher concentration of non-psychoactive compounds. This makes it suitable for various products, such as paper, textiles and clothing. Companies: Medical Marijuana Inc. (MJNA), Earth Sciences Tech Inc. (ETST), Lexaria Bioscience Corp (LXX:CNX).

Investing and Finance: Companies involved in the investment and finance of cannabis, such as holding companies and asset managers, are also part of the dynamic marijuana sector. Companies: CannaRoyalty Corp (CRZ:CNX), First Harvest Corp (HVST), Amfil Technologies Inc. (AMFE).

Marijuana Products: The Marijuana Products industry is comprised of companies that are involved in the development and sale of marijuana-infused products, such as drinks, oils and lotions. Companies: Cannabis Sativa Inc. (CBDS), Radient Technologies Inc. (RTI:CA), Lifestyle Delivery Systems Inc. (LDS:CNX).

Other Ancillary: This industry consists of companies that contribute to the broader cannabis industry and that do not fit any of the other categories. Examples include companies that produce breathalyzers and testing kits, cannabis clinics and marijuana vending machine developers. Companies: Canada House Wellness Group Inc. (CHV:CNX), Cannabix Technologies Inc. (BLO:CNX), Lifeloc Technologies Inc. (LCTC).

Real Estate: Companies that develop, own or lease commercial property for the purpose of cannabis business are part of the marijuana Real Estate industry. Companies: Praetorian Property Inc. (PRRE), Innovative Industrial Properties Inc. (IIPR), Grow Condos Inc. (GRWC).

Secondary Services: The Secondary Services industry consists of businesses that provide general consulting and business services to marijuana growers and retailers. Consulting services include market research, business development, branding and logistics. Companies: Cannagrow Holdings Inc. (CGRW), Novus Acquisition and Development Corp (NDEV), Americann Inc. (ACAN).

Technology and Media: The Technology and Media industry includes companies that provide software and media solutions to cannabis businesses and consumers. These services include enterprise software, e-commerce services and trading platforms for cannabis companies. Companies: Helix TCS Inc. (HLIX), Eco Science Solutions Inc. (ESSI), Bang Holdings Corp (BXNG).

Despite all the promise of recreational weed, most viable marijuana investments are concentrated in the medical biotechnology/pharmaceutical industry – at least for now. Investors looking for an immediate impact on their portfolio are more likely to succeed with a medical grower.

However, recreational weed is expected to be a huge money maker in the not-too-distant future. Favorable government policies, steadily growing public support and a burgeoning grower industry make recreational marijuana a promising enterprise across North America.

How to Build a Green Portfolio

Many of the same strategies involved in building a traditional stock portfolio also apply to the marijuana sector. Things like asset allocation, long-term strategy and deep fundamental analysis are critical for long-term success. At the same time, however, the marijuana industry has several unique features that investors need to grasp.

For starters, the marijuana industry is inundated with speculative investments and overhyped stocks that don’t actually have a viable business model. This isn’t always apparent when one looks at the relative success of marijuana stocks. This means many marijuana investments are overvalued.

Marijuana stocks are also highly volatile. After surging to record highs following legalization, many leading stocks found themselves in the doldrums in the first quarter as political uncertainty undermined confidence in the industry.

Against this backdrop, the following strategy is likely to yield the best outcome for investing in this rapidly growing sector.

1. Diversification is key

Diversification is the cornerstone of investing. For a sector like marijuana, where picking winners and losers isn’t easy, diversification carries even greater significance. Right now, there are over 250 stocks in the marijuana sector. Among them are future billion-dollar companies as well as duds that will eventually file for bankruptcy. A diversified portfolio of marijuana securities is therefore necessary to survive what could be a volatile few years for the sector.

2. Gain indirect exposure

There are both direct and indirect ways to gain exposure to a sector. Although most marijuana enthusiasts are rushing to growers and retailers, they should also consider other companies in the value chain that make the business possible in the first place. These companies are certainly benefiting from marijuana, but are not tied to it and thus won’t go bust if the sector hits a snag.

A company like Scotts Miracle-Gro (SMG) provides the type of indirect exposure our portfolio needs to survive volatile turns in the market cycle. SMG is not a marijuana stock, but provides specialty fertilizer and supplies to the pot industry. In other words, it is benefiting from the sector’s growth without being completely tied to it.

3. Conduct fundamental analysis

There are a lot of cool sounding marijuana stocks at play right now, but that shouldn’t be your criteria for investing. Nor should you rely on a hunch for picking a winner in a sector prone to wild price fluctuations. Remember: you are not picking from the S&P 500, but from a batch of companies that have an extremely limited track record in the market.

You should therefore come to terms with the stock’s intrinsic value (i.e., what it’s really worth). This means reviewing its business model, profitability, revenue, return on equity and overall growth strategy. In other words, read the stock’s financial statement carefully.  

4. Don’t wait for a pullback to enter the market

Cannabis stocks may be volatile, but that doesn’t mean you should wait for a pullback before you invest. Although this is a common strategy investors employ, it rarely pays off. It may be painful to buy a share at 52-week highs, but it’s even worse to watch that company defy your expectations of a pullback.[6] The good news is marijuana investments are still new, so the good ones still have a long way to go before they reach their ceiling.  

5. Develop a long-term plan

It’s perfectly acceptable to allocate a certain portion of your portfolio to speculation (i.e., choosing stocks you believe can be bought now and sold at a substantial gain later on). However, your overall portfolio strategy should be based on long-term objectives. This is the only true way to maximize investment success.

As a nascent industry, marijuana offers plenty of long-term growth. There’s lots of reasons to be bullish over its long-term prospects. This alone should deter investors from being too short-sighted with their cannabis portfolio strategy.

6. Know that you’re investing in an industry with top notch growth

The reason many people enter the cannabis market is the realization they may be investing in a once-in-a-lifetime opportunity. Legalization is long overdue, and pent-up demand is not like anything we’ve ever seen. This has been clearly reflected in the industry’s rapid acceleration in such a short period. The growth and widespread adoption of legal cannabis in all its forms should serve as a motivator for investors looking to tap into this sector.

Legalization and the Future of Marijuana Investments  

Marijuana legalization across much of North America is a paradigm shift both in terms of public consciousness and public policy. Although the path forward will be riddled with uncertainty, the general trend is leaning toward looser regulation of recreational cannabis and increased support for medical research.

The marijuana sector is booming right now, but is trading at only a fraction of its full potential. The huge sales numbers we saw in 2016 are likely a sign of things to come, as the sector benefits from surging demand and growing mainstream acceptance of cannabis use. These factors could drive the next bull market in the marijuana industry – one that could rival the the dot-com boom.

From an investment perspective, cannabis stocks can still be had for relatively cheap. Like any breakout industry, there are a lot of duds out there trying to capitalize on the momentum. But there’s plenty of solid picks with fantastic growth prospects for investors with a little courage and a lot of patience.

Sources

[1] Trey Williams (February 12, 2017). “Marijuana tax revenue hits $200 million in Colorado as sales pass $1 billion.” MarketWatch.

[2] Debra Borchardt (April 13, 2017). “Canada Take Big Steps Towards Creating $8 Billion Legal Marijuana Industry.” Forbes.

[3] Debra Borchardt (January 3, 2017). “Marijuana Sales Totaled $6.7 Billion In 2016.” Forbes.

[4] Investopedia. Over-The-Counter Market.

[5] Kesavan Balasubramaniam. “How do I buy an over-the-counter stock?” Investopedia.

[6] Jeremy Lutz (March 2, 2017). “7 Essential Tips To Succeed With Cannabis Stocks.” Ino.com.

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.6 stars on average, based on 504 rated postsSam Bourgi is Chief Editor to Hacked.com, where he specializes in cryptocurrency, economics and the broader financial markets. Sam has nearly eight years of progressive experience as an analyst, writer and financial market commentator where he has contributed to the world's foremost newscasts.




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