These are the cannabis companies the manager of Evolve’s U.S. Marijuana ETF is betting on

Elliot Johnson has heard countless stories of cannabis investors who bought into Canadian companies such as Canopy Growth Corp. early on and rode the green rush to staggering returns.

Since the Trudeau government first tabled a bill to legalize recreational cannabis in April 2017, Canopy’s share price has skyrocketed, earning patient investors, who held on through two years of volatility, more than 470 per cent in returns. Similar returns were available in other companies such as Tilray Inc. and Aurora Cannabis Inc.

Those who missed out in Canada may have another chance now in the U.S., said Johnson, a portfolio manager at Evolve ETFs.

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Johnson manages the Evolve U.S. Marijuana ETF, which became the world’s first U.S.-focused cannabis ETF when it began trading on Wednesday. The ETF is compromised of 38 companies to begin and no single name will have more than a 10 per cent weight, Johnson said. The ETF will charge 0.75 per cent in management fees and an additional 0.25 per cent in fixed administration fees.

Evolve may only have the space to itself for a day however: Horizons ETFs will also be entering the market through the Horizons U.S. Marijuana Index ETF, which is scheduled for a Thursday launch.

“The Canadian growth story is going to be viewed in the fullness of time as being less exciting than the U.S. story,” Johnson said.

The appeal to investors should come from the simple fact that the U.S. market is the largest in the world, Johnson noted, even without cannabis being legal at a federal level. The drug is only available recreationally in 10 states and medicinally in 33, meaning that future legislation, both at a state and federal level, may continue to act as a catalyst to the stocks, Johnson said.

Proposed federal legislation in the form of the Secure And Fair Enforcement Banking Act could also finally open the door for American institutional investors to pump millions into U.S.-based cannabis companies. The market is waiting on legislation to allow companies to be able to list on domestic stock exchanges instead of having to do so in Canada, predominantly on a junior stock exchange in the CSE.

Clearing both hurdles would unlock significant latent value, he said. While Canadian cannabis companies are already trading at their highest valuation, he said, most U.S. names are undervalued due to legal uncertainty.

The Canadian growth story is going to be viewed in the fullness of time as being less exciting than the U.S. story

Elliot Johnson

“What you would see is valuations quickly change,” said Johnson. “Even if valuations just normalize … these companies get a lot bigger than Canadian companies very quickly because their sales are so much higher already.”

Johnson sees this potential for at least three names in his portfolio — Curaleaf Holdings Inc., Harvest Health & Recreation Inc. and Slang Worldwide Inc.

Curaleaf has one of the top weights at 5.6 per cent. The reason it’s one of Johnson’s top picks is because the company’s management is focused on a goal of building a single, powerful brand. That’s a key trait that Johnson watches for because he believes it’s a company’s agricultural operations that are most likely to be commoditized and setting up a strong brand is therefore the key to long-term success.

Curaleaf, which closed Wednesday at $13.35, is already up more than 90 per cent in 2019 and was recently labelled as the U.S. cannabis industry leader by GMP Securities.

Harvest is taking the opposite approach, establishing over 20 different brands, but its strong appetite for growth — and the manner in which it has accomplished it — has been enough to convince Johnson.

The company, which also has a 5.6 per cent weight in Evolve’s ETF, has multiple locations in eight states and operates in 17 when both its recreational and medicinal sales are taken into account. Each time Harvest expands into a new state, Johnson likens it to them launching a startup.

“One of the things they’ve been very successful in doing is going into the states as they’ve legalized, applying for and winning the licenses to operate in those states and then booting up from ground zero in each state,” he said.

Harvest, which saw its stock close Wednesday at $11.70, is up more than 65 per cent since the beginning of the year.

One of Johnson’s riskier selections is Slang Worldwide Inc., which only has a 1.5 per cent weight in his portfolio. Slang is the smallest company of the three and only has a $520 million market cap, but because it’s so diversified in its products — vapes, edibles and dry flower for smoking — Johnson sees real potential for the company to grow from an unknown entity to a domestic force.

“This market in particular is characterized by these names that come out of nowhere to capture the public attention,” he said.

On Wednesday, Slang closed at $2.54.

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