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 7 sub-sectors within the overall market that are well worth your attention as the performance of each has varied considerably ranging from +12% to -30.6% in September. That is a dramatic spread and one worth understanding as you position yourself in this burgeoning market sector.

My 7 baskets of stocks/ETFs consist of:

1. The Marijuana & Marijuana-related ETFs Category

This category consists of 14 ETFs of which 2 are US-centric (HMUS; USMJ), 2 are leveraged plays (HMJU; HMJI), 2 are marijuana/marijuana-related plays (ACT; MJ) and the remaining 8 are more broadly based and 5 the 14 are passively managed and 8 are actively managed.

6 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 14.6% in September, on average, following on the heels of a 11.8% decline, on average, in August.
• the passively managed pure play ETFs (HMUS, HMJR, HMMJ, THCX) declined 16.5% in September, on average, vs. "only" a 13.1% decline, on average, in August.
• the actively managed pure play ETFs (MJJ, YOLO, CNBS, TOKE & USMJ) declined 14.6% in September, on average, vs. "only" a 12.4% decline, on average, in August.
• the very diversified ETFs (ACT & MJ which contain a large number of tobacco, alcohol, packaged goods consumer and pharmaceutical companies) declined 10.0% in September, on average, vs. a 9.3% decline, on average, in August.
• the 2x daily bull ETF declined 29.5% in September following a 30.5% decline in August.
• the inverse ETF increased by 12.0% in September following a 12.2% increase in August.

2. The CBD/THC Extraction Stocks Category

This category consists of four companies (LABS, VGW, RTI, NEPT) 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, on average:

• declined 16.9% in September following a 17.3% decline in August but has
• increased 61.2% since the beginning of the year.

3. 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 (NBEV, BEV, ZENA, TNY, SPR, DIXI.U), on average:

• declined 13.6% in September following a 14.1% decline in August and has
• declined by 68.3% from its March/April peak.

4. 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 (STIL, ALEF, ELXR, TGOD, WRLD.U), on average:

• declined 30.6% in September following a 1.4% decline in August and has
• declined 28.3% since the end of last year.

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

This category consists of 14 companies that have invested heavily in companies directly involved in the cannabis sector. 5 (ABBV, MO, CODI, IMBBY, ACNFF) pay dividends ranging from 5.3% to 8.1%; 5 (TAP, BUD, IIPR, NVS, SMG) pay dividends ranging from 2.2% to 4.0%, 2 (STZ; ASBFY) pay dividends of 1.6% & 0.9% and 2 (PYX & ATD.A) don't pay any dividends.

This basket of 14 stocks, on average:

• increased by 0.9% in September vs. a decline of 7.2% in August
• increased 17.4% since the beginning of the year.

6. The Vaporizer Manufactures, Vape Extract Suppliers & Vape-related Stock Category 

There are 3 ways to play the cannabis vape market: choose to buy the vaporizer manufacturers and suppliers (KSHB; VPRB; GNLN; MCIG; TPB; OGI; WCIG; NXTTF; VGR), go after the recurring revenue provided by the extract suppliers (CRON; SPRWF) or invest in the less volatile vape-related big tobacco companies (MO; IMBBY; BTI; PYX; JAPAY).

• The basket of 9 vaporizer manufacturers, on average, declined 28.6% in September.
• The basket of 2 extract suppliers, on average, declined 17.4% in September.
• The basket of 5 vape-related tobacco companies, on average, declined 3.4% in September. and up 17.4% so far in 2019.

7. The Cannabis Stocks With Mkt. Cap of +C$1B and +C$5/Share Category

There are, at last count, 313 cannabis stocks trading on the various Canadian and American stock exchanges of which only 11 (3.5%) meet the above criteria. They are: CGC, ACB, APHA, CRON, TLRY, CL, CURA, TRUL, GTII, CWEB and HEXO.

• A basket of each of those 11 stocks, on average, went down 10.86% in September improving considerably from the decline of 18.8% 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.

• Personally, I am inclined to invest in the broadest most diversified plays and that suggests serious consideration of either:
  • the Advisor Shares VICE ETF which was only down 1.5% in September,
  • the large cap marijuana-related and mostly dividend paying stocks category which was marginally up 0.9% in September and gives one a more conservative indirect play on the burgeoning cannabis market or
  • a more aggressive pure cannabis play in either the TOKE or CNBS ETFs, which were down 12.5% and 12.6%, respectively, with the edge going to TOKE which only has a 0.42% management fee compared to the much higher 0.75% for CNBS, which are worth considering. Even such poor performances of those 2 ETFs were much better than the -18.6% for cannabis stocks, in general, in September.

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.