Today, I going to let you take a look behind the curtains here at Inside Alpha.
Each week, we study, scour and scrutinize the market. We dig and search for big stories and what will most-likely affect the stock market over the next several days and weeks.
Then toward the end of the work week, we all sit down and discuss what we’ve found. We decide on which industry is facing the largest change over the next week… and choose that for our following week’s Alpha contest.
Oftentimes, that means our algorithm gets to collect even more information than usual. As news stories shift and flip certain sectors of the market, it creates unique trading performance. By running our algorithm on those instances, its artificial intelligence component learns even faster. That’s the idea anyway.
But sometimes, we don’t pick the right industry ahead of time. We’re not perfect. But sometimes, even if we were, we’d still not be able to foresee great shake ups.
I’m telling you all of this because that happened this week.
We are looking at biotechs this week. But if we had a do over, the obvious choice would be cannabis. You see, pot stocks are the interesting story this week.
Monday, a huge story broke about the industry. CannTrust, a $1 billion cannabis grower, announced that about half of its entire production for the current year was seized by Canadian regulators. If this sounds like the kind of drug bust story you see on the local news, it is… but bigger.
The company reportedly filed to grow cannabis at certain locations… but hadn’t received permission from authorities. Yet, it grew there anyways. So, the regulators seized everything that was grown illegally.
You may be thinking: but isn’t pot legal in Canada? Yes, it is. But that still doesn’t mean you can grow anywhere you like and then try to sell it… especially not when you’re dealing with metric tons of the stuff.
This is the kind of story skeptics have been waiting for. Those naysayers downplaying the remarkable boom and growth the cannabis industry has seen these past months wanted nothing more than to see a big company like CannTrust screw up so massively.
But that’s why the bulls among us have to take note. This story hopefully hasn’t affected your portfolio. But it easily could. More on that in a moment.
The second story this week in the industry is the launch of the third major pure-cannabis stock ETF. Innovation Shares’ Cannabis ETF (THCX) opened trading on Tuesday. It joins AdvisorShares Pure Cannabis ETF (YOLO) and the leading one, ETFMG Alternative Harvest ETF (MJ). I’ll have more on this after the third striking news story this week.
Yesterday, the House held its first major hearing on legalizing pot… or at least decriminalizing it. Democrats from the House Judiciary Committee invited four pro-cannabis witnesses to discuss the negative effects of current marijuana law on black and Hispanic communities. The topic wandered to the age-old question about pot being a gateway drug. So, obviously, this won’t necessarily turn into actionable legislation just yet. But it is the first step toward progress for the industry. After all, legislation is born out of committee hearings.
All of this happened in just the first three days of the week. As you can see, cannabis would have made a fine topic for this week’s Alpha contest. But you can’t win them all.
Though, I will leave you with something important to consider from all of this.
With regulators now biting at the heels of companies that get out of line, even in Canada… politicians beginning long debates about pot’s role in the War on Drugs… and other shake ups (like the firing of Canopy’s CEO – a story for a different article)… we’re seeing a shift come to the industry.
The idea that all pot stocks move together once made sense. Early investors bought them all without worrying about things like legally approved grow houses. Now, you have to be more careful.
So, back to the main story on Tuesday… the next time you look at an ETF as the best way to just play a whole industry, make sure you know what companies that fund holds.
For instance, that AdvisorShares’ ETF with the ridiculous ticker YOLO… It has a larger position in CannTrust than any of the other major cannabis stocks. That’s why it has fallen by twice as much following that company’s heartbreaking news.
MJ and the new THCX ETFs were barely affected by that story, as they hold far fewer shares as a percentage of their overall holdings.
Marijuana investing is reaching a new stage in its development as a market. It’s time we all pay even more attention.