Determine your investment objectives before crafting your plan

Question: Is it better to invest your money in 5-10 marijuana stocks or to spread your investment over a larger group of stocks, for example, 20-40 stocks? Why? What is your expectation for each of the holdings in The Cannabis Report Model Portfolio, especially Ascent Industries (CSE: ASNT)?

Answer: With respect to a portfolio in general, the most important factor is the investment objective(s). The answers will be different, for instance, addressing the needs of a person who wants to be aggressive to maximize capital gains compared with a person who wants to improve the return on their overall portfolio by investing some assets in cannabis stocks. So in answering the question I will assume it is for a typical long term investor in cannabis stocks expecting a perceived opportunity for excellent returns.

Included in our thinking must be the person’s risk tolerance. Some people get nervous thinking about flipping a coin to see who pays for lunch at a fast food restaurant while others can go to Las Vegas for a weekend and win or lose $100,000. Cannabis is a relatively new and underdeveloped industry. The laws are just being formulated and the shares have only been trading for around four years and are volatile. If you are risk averse, you should invest less and diversify more. You might even consider not investing in the group. But if you are willing and able to assume some risk, cannabis is a rare opportunity.

Next we should consider how much money you have to invest. If you have $10,000 and want to take a chance, then probably one or two holdings will do it. If you have a $100,000 portfolio that is invested in a broadly diversified number of stocks, then you might allocate 20% to cannabis related stocks. That would mean between two and four different holdings. But if you are comparing yourself to a professionally managed mutual fund you own in your retirement plan that has a portfolio worth hundreds of millions of dollars or more, then typically 3% would be a “normal” holding and 5% would be an aggressive holding in a stock the portfolio manager is very optimistic about.

So when you ask about 5 to 10 holdings or 20 to 40 stocks, you are talking about 20% in one stock (5 stocks in total) or 10% in one stock (10 stocks in total). If you think about 20 stocks that means 5% in each stock and 40 stocks would limit you to 2.5% in each. If we assume a “typical” person would have between $10,000 and $100,000 to invest, I think somewhere between 2 and 20 stocks would do it. When I started The Cannabis Report Model Portfolio, for example, I thought 10 holdings of 10% each would be about right. I started with seven holdings and around 30% in cash. That gave me reserves to buy three more stocks that came along or cash to add to stocks already in the portfolio or as a defensive position in case the group went into a correction.

A problem that professional portfolio managers face is that it is hard to find 30 or 40 attractive stocks to own. If you ask a portfolio manager for the five favourite stocks in their portfolio, you will get an answer. If you ask for the next five favourites, then you know for some reason rightly or wrongly, the manager doesn’t like those five quite as much as the first five. So in his or her opinion, those ten stocks will not perform as well as the first five. And so it goes. If there are 40 or 50 stocks in the portfolio, then his expectation for numbers 45 to 50 are probably quite a bit less than for numbers 1 to 5. Eventually, if you end up owning every stock listed on the exchange, you have an Index Fund. Here the manager is saying you are better off owning them all and getting average results than to pay management fees to have someone actively manage the portfolio.

Here is a rundown of the individual stocks in the portfolio:

• Ascent Industries: (CSE: ASNT) is a Licensed Producer under to cultivate cannabis and produce cannabis extracts. ASNT has applied for a controlled drugs license under the Controlled Drugs and Substances Act. In the U.S., ASNT is licensed for production, processing and wholesale distribution of cannabis in Oregon and Nevada. Operations currently include facilities in B.C. and in Oregon and Nevada in the U.S. Activities at each facility include cultivation and extraction in Canada, and production, processing and wholesale distribution of a catalogue of premium cannabis products in Oregon and Nevada. In the past few weeks there is evidence investors are beginning to recognize ASNT’s inherent value.

• Canopy Growth (NYSE: CGC) (TSX: WEED): has once again been the catalyst to lift the cannabis stocks out of the doldrums. WEED is the clear cut leader of the Canadian cannabis industry and initiated many trends and leads the way for international expansion. I expect a steady flow of news as management invests the $5 billion put in its coffers by Constellation Brands. In my opinion, Canopy Growth should be a core position in every cannabis portfolio.

• Khiron Life Sciences (TSXV: KHRN): is a vertically diversified cannabis company in Colombia, South America. Because of the cost structure in Colombia, KHRN will be one of the lowest cost producers in the world over the foreseeable future. In addition, they have diversified into many other markets such as cosmetics, for example. I have met many members of the management team that is comprised mainly of Colombians with a representative number of Canadian and others including Vicente Fox, former President of Mexico. This is a strong group that is carrying KHRN forward using the Canadian model as a guideline however the shares remain substantially undervalued.

• Lexaria Bioscience (CSE: LXX) (OTCQX: LXRP): their DehyrdraTECHTM technology provides greatly improved bioavailability of cannabis, vitamins, certain pain killers and nicotine. LXX is building an unmatched base of rigorous scientific evidence backed up by a portfolio of patents to protect the technology. I have followed LXX for over two years through discussions with the same senior management which makes me very comfortable having it in the portfolio. I expect in the next six months to a year there will be explosive news that will be a game changer for the company and any portfolio that owns the stock.

• Organigram (TSXV: OGI): has been a long-term favourite of mine among the Licensed Producer names. In a recent conversation with management we discussed the fact that they are one of the lowest cost Canadian producers at under $1.00 per gram. In addition, they have funded an aggressive international growth plan that should establish them in markets around the world. Because the stock is comparatively undervalued, OGI is a name that always comes up when takeover targets are mentioned. This is a company that quietly goes about its business always staying at or near the top of Licensed Producer group in Canada.

• Radient Technologies (TSXV: RTI): a bit of a sleeper probably because they have already selected Aurora Cannabis (TSX: ACB) as its dance partner and vice versa. RTI has a proprietary extraction process called Microwave Assisted Processing (M.A.P.), that can provide substantially higher yields and purity compared to conventional natural extraction. I like the cannabis oil market and the fact that ACB provides financial support and a natural major customer. The company tends to be low-key which provides investors with an opportunity to accumulate the stock. I believe the end result will be consolidation with Aurora at an attractive price.

• Sunniva (CSE: SNN) (USOTC: SNNVF): potential leader in the California market with a first harvest just a few months away and construction of a Canadian operation expected to come on stream early in 2019. The company is about to embark on an aggressive vertical integration plan in order to solidify its leading position in California which is a market larger than all of Canada. Some analysts suggest the Canadian assets account for the entire market cap of the company which means at current price you are getting the U.S. assets for free. SNN has been a top pick of mine since going public and I am closer to adding to the position.

• Cash at around 30%: I am comfortable with some cash in the portfolio at this time. This is a rapidly evolving sector and this gives me the flexibility to add new positions and to add to holdings I like on any corrections.