As many investors already know, the Horizons Marijuana Life Sciences ETF (TSX:HMMJ) is an ETF out there tracking the cannabis industry in its entirety.
What’s interesting when you dive into the actual holdings of the fund, however, is you will see that it’s not only cannabis producers are included, but also various companies that supply products to cannabis producers to grow marijuana, such as fertilizer, for example.
This interesting factoid is one which got me thinking: wouldn’t it make more sense to invest in the “picks and shovels” (fertilizer companies, greenhouse companies, etc.) rather than the “miners” or producers? After all, the extreme volatility we’ve seen in various cannabis producers’ stock prices has not been seen in the valuations of fertilizer outfits, for example, making these intrinsically safer bets over the hyped-up producers themselves.
These fertilizer companies will also greatly benefit from increased volume over time, allowing for margin expansion as higher quality fertilizer that can grow plants quicker can be sold at a premium.
Another thought came to mind as well: why aren’t we tracking sales of inputs like seeds of specialized fertilizers, to approximate “real” growth in Canada’s cannabis sector?
I’m skeptical of a lot of the production numbers thrown out in the financial reports of many companies, but I think since it’s relatively easy to track inputs, a whole other analysis-based model could show where we’re really at.
Diving deeper into the actual holdings of funds, whether they be ETFs or mutual funds, is an important exercise investors ought to take, to understand what companies the investor actually owns. When you dive deeper into these holdings, you may find some names on the list that surprise you- research those.
Invest wisely, my friends.
