The cannabis sector is extremely volatile with many of the stocks trading for only pennies a share so I have been slicing and dicing the market over the past few months and I have identified 9 sub-sectors within the overall market that are well worth your attention as the performance of each has varied considerably ranging from + 40% to -18.5% during the past month. That is a dramatic spread and one worth understanding as you position yourself in this burgeoning market sector.

My 9 baskets of stocks/ETFs consist of:

1. Marijuana stocks trading at $5 or more, i.e. non-penny (see constituents here),
2. Marijuana-related consumer products & pharmaceutical stocks (see constituents here and here),
3. Marijuana & marijuana-related ETFs (see constituents here and here) subdivided into:
   • passively managed,
   • actively managed,
   • broadly diversified and
   • leveraged
4. Marijuana stocks trading on major exchanges in both the U.S. and Canada (see constituents here),
5. Heavily shorted marijuana stocks (see constituents here),
6. Marijuana stocks with the lowest beta, i.e. least volatile (see previous constituents here),
7. CBD/THC extraction stocks (see constituents here)
8. Marijuana-infused beverage stocks (see constituents here)
9. Cannabis companies concentrating on Europe (see constituents here)

1. The Non-Penny Marijuana Stock Category

This category consists of the top 1% (21) of "pot" stocks trading at a minimum of $5/share.

This basket has:

• declined 15.9% since the beginning of the year,
• declined 53.4% from its peak price in March or April and
• declined 18.5% in August. Only 5 stocks in this basket were up in August of which only 2 were up appreciably, namely, Aphria Inc.(+17%) and Cresco Labs Inc (+8.6%).

2. The Marijuana-related Consumer Products/Pharmaceutical Stock Category

This category consists of 14 stocks that have invested heavily in companies directly involved in the cannabis sector of which 5 pay dividends ranging from 5.3% to 7.7%, 7 pay dividends ranging from 0.9% to 4.4% and 2 don't pay dividends.

This basket of stocks has:

• increased 20.8% since the beginning of the year,
• declined 14.5% from its peak price in March or April and
• declined 2.8% in August.

3. The Marijuana & Marijuana-related ETFs Category

This category consists of 14 ETFs of which two are US-centric, two are leveraged plays, two are marijuana/marijuana-related plays and the remaining eight are more broadly based and, of the 14, five are passively managed and eight are actively managed.

Six ETFs have been added over the course of 2019 making historical performance comparatives for all periods moot except for the July/August period but some interesting results are noted:

• the total basket of ETFs, in total (excluding the leveraged ETFs) declined 11.8% in August,
• the passively managed ETFs declined 13.1%, on average,
• the actively managed ETFs declined 12.4%, on average,
• the 2 very diversified ETFs (i.e. containing a large number of tobacco, alcohol, packaged goods consumer and pharmaceutical companies) declined 9.3%.
• the 2x daily bull ETF declined 30.5% and
• the inverse ETF increased by 12.2%.

4. The Dual U.S./Canada Exchange-listed Marijuana Stock Category

This category consists of the 6 stocks are listed on both the TSX, Canada's major stock exchange, and America's NYSE, Nasdaq or Amex stock exchanges. Being listed on major stock exchanges in both Canada and the U.S. offers them the potential for sizable investments from major institutional investors who, more often than not, won’t invest in companies listed on the more ambiguous OTC markets and the lesser known TSXVenture or CME exchanges.

This basket of stocks has:

• increased 8.5% since the beginning of the year,
• declined 50.4% from its peak price in March/April and
• declined 16.8% in August.

5. The Most Heavily Shorted Marijuana Stock Category

Shorting, or short-selling, is when an investor:

• borrows shares and immediately sells them,
• hopes to buy them later at a lower price,
• return them to the lender and pocket the difference

That is what traders did back on August 13th with nine marijuana stocks. As of last Friday those stocks had declined by 29% ranging from -44% to -17% (while the marijuana stock sector, in total, went down 13% during the same period of time). Were the short sellers to have returned the stocks last Friday to those they had originally borrowed them from their "investment" would have:

• appreciated 40% in just the last two weeks of August.

6. The Lowest Beta (Least Volatile) Marijuana Stock Sector

Beta is a statistical value that measures the rate of change of a stock versus the price change of the overall market and is commonly used to determine the volatility of a stock.

• When a stock’s beta is 1, it means the stock price moves with the market.
• When a stock’s beta is less than 1 but above zero it is less volatile than the overall market.
• When a stock's beta is more than 1 it is more volatile than the overall market.

This category consisted of 8 stocks with betas ranging from 0.18 to 1.8 but in spite of supposedly being less volatile than the market in general that basket of stocks:

• declined 11.4% in August which was only slightly less than the 13% decline for the entire marijuana market.

7. The CBD/THC Extraction Stocks Category

This category consists of four companies that function as the middle-man of sorts in the cannabis supply chain purchasing dried cannabis, extracting the oil-like substance containing THC or CBD from the plant, and selling it back to the same producers, or to other producers that have requested cannabis extract. The category has received a lot of hype with the suggestion that its stocks are poised to capitalize on what could be the next big cannabis investing trend – extracted products but it has been in decline since its peak back in March/April.

This basket of stocks has:

• increased 94% since the beginning of the year but has
• declined 32% from its peak price in March/April and
• declined 17.3% in August.

8. The Marijuana-infused Beverage Category

Established beverage companies, as well as entrepreneurs, are developing formulas and methods for infusing CBD or THC, or both, into beverages in hopes of becoming the next "monster" of the rapidly emerging cannabis beverage market but no company stands out, as yet, as the company to invest in.

This basket of 6 stocks has:

• declined 63.4% from its peak in March/April of this year and has
• declined 14.1% in August.

9. Cannabis Companies Concentrating on Europe Category

The CBD industry will grow more than 400% through 2023 in Europe making it the largest legal cannabis market in the world and the following companies consider this to be a great opportunity to enter and/or expand through Europe.

The basket of 5 stocks has:

• increased 3.7% year to date
• declined 51.6% from its peak in March/April of this year and has
• declined 1.4% in August.

Conclusion

Which approach you take to investing in the pot stock sector is up to you but I hope the above analyses help you decide which category is best for you.

• In my opinion, however, shorting stocks (up 40% in August) should be left to professional traders as should trading in leveraged ETFs (the inverse ETF was up 12% in August) so that leaves seven categories to consider.
• Personally, I am inclined to invest in the broadest most diversified plays and that suggests serious consideration of either:
  • one of the two very diversified ETFs mentioned above (only down 9.3% on average in August)
  • or the large cap marijuana-related and mostly dividend paying stocks category (down 2.8% in August) which gives one a more conservative indirect play on the burgeoning cannabis market.

Incidentally, you might want to forward this article to your portfolio manager/financial adviser as such insights into the fledgling market are not available elsewhere.