Investing in CBD

Subsequent to the passage of the Agricultural Improvement Act of 2018, signed into law December 21st, there has been a significant amount of speculation as to the rise of the market for CBD oils, edibles, supplements and derivatives. Migrating across the country are calls to create a system – or infrastructure – if you will, to enable this budding (pun intended) industry to grow and thrive. This bill clarified two gaps in prior legislation related to industrial hemp, namely removing hemp from the definition of marijuana and and creates an exception to the THC in hemp – essentially declassifying it as a Schedule I narcotic, as long as it has no more than 0.3 percent. Then the state has to enact processes – subject to USDA approval – before being legal. The most onerous of which is mandatory testing of the THC threshold.

In a role reversal of sorts, the new reality is that CBD is legal at a federal level with a hodge-podge of regulations at the state level with a degree of federal oversight. For the time being, one can assume differing laws depending on the state. This is also subject to change regularly. For purposes of this discussion, we’ll assume Texas is moderate – neither at the bleeding edge nor trailing the pack – as HB1325 was signed into law last month and retailers are already making an appearance – pending registration. Many – including myself – are attempting to identify ways to profit from these endeavors with no clear answers. DivHut (via a guest post) tackled this question and laid out a great foundation before withering away at the end. I do have to concur there may well be room to run in this space, the key being in what way – which we’ll explore a little further.

Retail is the obvious starting point with CVS and Walgreen are dipping their toes in the water while Amazon is marketing CBD-less hemp oil. The bad news, if any, is that any sales made by these giants would be negligible to earnings. This isn’t to ignore the mom-and-pop shops or franchise operations appearing, only that as a passive investor the options currently limited.

Manufacturing is the second area for research but winds up being the most convoluted depending on your interest, e.g., topical, edible, oil, prescription drug, THC or CBD, et.al. My approach is to categorize into two segments: Consumer and Cultivation. The consumer side being a product supplier to a retailer or consumer direct. Cultivation is a little trickier in that the Texas bill legalizes hemp farming and the sale and possession of hemp-derived CBD oil containing less than .3% of THC. Meanwhile growing hemp is not yet legal until the USDA provides guidelines and approves state applications. This could be considered a quagmire of sorts, but of a temporary nature.

Extraction and Testing is the final area to watch as this is where the heavy investment will take place. One piece of the Texas Law is, ” the laboratory must be accredited under ISO/IEC 17025 or other comparable standard. License holders may not use their own laboratories for state testing unless the license holder has no ownership in the laboratory or less than a ten (10) percent ownership interest if the laboratory is a publicly traded company.” Consider that most – if not all – of the law enforcement labs require upgrades to differentiate between now legal and still illegal products. Xabis, an independent lab, has forged a deal with Westleaf that includes equity based compensation.

So who currently has my eye?

  • Retail – Elixinol Global (ELLXF). Assuming this Aussie company can navigate through the FDA regs unscathed.
  • Manufacturing – Canopy Growth (CGC) – pursuing a license to process hemp in New York state
  • Testing – Eurofins Scientific (ERFSF)

All of which are highly speculative – so tread lightly and do your due diligence. Is this a space you too are looking at (additional suggestions are always welcome)!

Update 4 Aug 2019: On Aug 1 I initiated a position in Innovative Industrial Properties Inc. (IIPR), a REIT in the medical space.

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Picking Winners & Identifying Losers

It has been said many times before that attempting to time the market is a fool’s errand. One approach common with Dividend Growth Investors the one taken by DivHut which is to  “…invest in a consistent and systematic manner. Over the long haul, being invested and staying invested in the stock market gives you the best long term odds of success.”  The benefits are consistency, removing emotions and dollar cost averaging while the disadvantages – particularly if fully invested – is the reduced ability to take advantage of “one day sale events” which are becoming more common.

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Portfolio Breakdown by Geography

I’m always intrigued by how investors position themselves in providing a measure of protection against market downturns.  Most common is sector diversification where the theory is a downturn in one area of the economy is offset by outperformance – or at least stability – in other areas.  DivHut recently posted his quarterly sector review which – as he indicated – is reasonably aligned with his risk tolerance and goals.  The weakness in this approach is his low exposure to Technology or in my case an overexposure to Financials.  So long as potential weaknesses are identified, this approach does allow a portfolio to be tilted towards sectors which the investor believes will outperform the broader market.

Another approach was presented by Roadmap2Retire last March where the attempt was made to isolate the geographic revenue diversification of the companies he owned.  A daunting effort to be sure, but I’m not sure the data he obtained was complete.  As an example, he reports BCE’s revenue as 100% Canadian.  That is likely as reported in filings.  Not reported is their 37.5% stake in Maple Leaf Sports which owns the Maple Leafs (NHL) and Raptors (NBA).  The NBA pays revenue sharing in US dollars (not Canadian).  Basically any minority stake, investments or joint ventures with other companies are likely to be excluded from any of the companies he owns.  The question becomes – is this revenue identifiable and negligible?

The approach I take is – first sector and secondly the country where the company is headquartered.  Dividends paid are recorded post exchange to US currency which does result in some fluctuation based on the relative strength (or weakness) of the dollar.  The following table illustrates the non-US source for roughly 15% of my dividends.

8.98% Canada
0.53% United Kingdom
0.04% Bahamas
2.44% Australia
0.13% Ireland
0.32% Mexico
0.00% China*
1.29% Hong Kong
0.20% Chile
0.26% Luxembourg
1.47% Singapore

* no dividend paid at this time

The UK dividends are set to increase once a merger involving one of my US companies is complete.  I may be forced to slow foreign purchases as recent political events have resulted in the US dollar weakening and the Yen and Swiss Franc strengthening.  If so, I’m sure I can find a few US companies to put my money into!

 

 

Prepping for ’17

In my inbox I found a message inspired (?) by my last post.  In a nutshell, it was a request for further insight into my October purchases.  I have to admit that, on the surface, the appearance is that I was throwing stuff against the wall to see what would stick.  I would like to think I’m slightly more calculating.  To set the scenario, I had an oversized cash position due to a merger, the markets had started their pre-election downward drift and the FBI just breathed new life into Candidate Trump’s aspirations.

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Hiding In Plain Sight

“cant see the forest for the trees”

Simply that you have focused on the many details and have failed to see the overall view, impression or key point.  Urban Dictionary

I find it interesting when multiple unrelated occurrences converge and coalesce into a singular thought.  Case in point:

  • Investment Hunting did a financial quiz with one of the questions being “I’ve never bought a stock on OTC Markets?” Wallet Squirrel’s response (presumably tongue-in-cheek) was, “No, no idea (what) that is. “Octopus Tentacle Club”?”
  • DivHut presented his June 2016 stock considerations with a response by Tawcan being, ” … I continue to like V, SBUX, National Bank (not sure if they’re listed in US market) …”

It dawned on me that there was a lack of understanding regarding the OTC (over the counter) market.  Without getting into the nuances (grey, pink, etc.), let me just that a significant benefit to US investors is unprecedented access to foreign markets – notably Canada, but also Australia, Singapore and more.  In this post, I’ll focus on Canada.

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2015: What Went Wrong

This is the final segment to the best and worst of 2015. This series was inspired Bespoke Investment Group’s article tailored to actual holdings in DGI portfolios. The first post, 2015: What Went Right can be found here.

Again I need to address the caveats:

  • Only publicly disclosed data culled from portfolios in my Blog Directory were used. If your blog is not listed, your data was not included.
  • My data only reflects a snapshot in time. Once entered in my database I generally make no updates.
  • I make no guaranty as to the accuracy of the data either through input errors, processing errors, or the legitimacy of the source data. Meaning, use at your own risk – or you get what you pay for.

Bespoke’s article raised a number of questions in my mind. Although not specifically targeted to the DGI community, I found it to be timely none-the-less. So the question today is why were so many ‘losers’ contained in DGI portfolios?

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