Will Warren Buffett Buy Pot Stocks?
Warren Buffett is arguably the greatest investor alive today. He took his life savings of just over $110 in 1942 and began investing for his future at age 11. Today, he's sitting on a net worth of almost $83 billion. And had it not been for donating tens of billions of dollars to charity over the past decade-plus, Buffett could be challenging Amazon's Jeff Bezos for the title of richest person on the planet.
There's arguably no event that gets the investing world more excited each year than Buffett's annual shareholder meeting for Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B), the company he runs. Although Berkshire Hathaway owns more than five dozen separate businesses in the insurance, energy, transportation, and retail industries, the company also has a hefty investment portfolio that, as of this past weekend, was worth almost $198 billion. That's not chump change, and what Buffett buys or sells tends to make headlines on Wall Street.
Berkshire Hathaway CEO Warren Buffett answering questions from reporters at the annual shareholder meeting. Image source: The Motley Fool via Flickr.
This past weekend, Berkshire's annual shareholder event was held, and between Buffett's annual letter to shareholders and a question-and-answer session, it represented a rare opportunity to pick the mind of the world's greatest investor.
But one question looms large as Buffett's company, which is sitting on a monstrous amount of cash, ponders its next acquisition and/or investment. That question is: Would Warren Buffett ever buy pot stocks?
Could Buffett ever cozy up to marijuana stocks?
Before you dismiss the idea as preposterous, here are a few things to consider.
First, you'd have a hard time finding an industry that's expected to grow at a faster pace over the next 5 or 10 years than legal cannabis. A recently released report from Arcview Market Research and BDS Analytics suggests that global weed sales will rise from $9.7 billion in 2017 to $31.3 billion by 2022. Investment firm Cowen Group is even more aggressive with its sales estimate, calling for $75 billion in annual revenue by 2030. That'd make the legal pot industry potentially bigger than the soda industry, on the basis of annual sales, in about a decade.
Second, even though there's limited data on the subject given that marijuana was only recently legalized in Canada, marijuana demand can probably be described as noncyclical. In other words, economic contractions or recessions are unlikely to have much, if any, impact on consumer demand. That would lend to the idea of steadier long-term growth for the pot industry.
Image source: Getty Images.
Third, there are ways to gain exposure to marijuana stocks without diving in headfirst. For example, Warren Buffett could consider a company like Scotts Miracle-Gro (NYSE: SMG), which in its previous fiscal year generated the bulk of its revenue from its core lawn and garden segment but has a subsidiary (Hawthorne Gardening) that caters to the pot industry. Scotts' subsidiary purchased Sunlight Supply for $450 million in 2018 in order to broaden its hydroponic product portfolio and more directly target small and medium-sized cannabis businesses. As a result, Hawthorne could seriously lift Scotts Miracle-Gro's top-line growth, all while providing 20% or less of the company's annual sales.
Fourth and finally, as we found out with Berkshire's nearly 2.9 million-share sale of Apple during the fourth quarter, not all of Berkshire's money is under Buffett's control. Between the Teva Pharmaceutical buy and the recent Apple stock sale, it's not out of the question that one of Buffett's investing team members could make the move into the cannabis industry unbeknownst to him.
Long story short, it's not a definitive "no" on Buffett buying marijuana stocks.
Buffett buying into pot stocks is a pipe dream
However, Buffett putting money into pot stocks is incredibly unlikely for a variety of reasons.
To begin with, Buffett prefers to buy into time-tested business models that can generate profits in any economic environment. That's not an accurate description of the marijuana industry at the moment. With few exceptions, most pot stocks are losing a lot of money. Aurora Cannabis (NYSE: ACB), which is expected to be the largest producer in the world by peak output, has lost 192 million Canadian dollars (CA$192 million) on an operating basis, excluding one-time costs and benefits, in the first six months of its current fiscal year. Sure, Aurora Cannabis is outproducing its peers, and Aurora could be on track for $2 billion-plus in sales by 2022, but for now, the company is a major money loser. Buffett tends to avoid untested and unprofitable businesses.
Image source: Getty Images.
Another reason Buffett is likely to avoid pot stocks is that he doesn't like to devote a lot of time to "managing" his investments. To be clear, I'm not suggesting that Buffett and his team purposely ignore earnings reports or pertinent news events for the companies they're currently invested in. Rather, I'm suggesting that Buffett aims to buy companies that don't require a lot of effort to stay on top of what's going on with the underlying business. Given how new the legal weed industry is, and with the understanding that legalizations are ongoing around the world, pot stocks require investors to be actively involved. That's not something Buffett would care for, and it's a big reason why he tends to avoid pharmaceutical and biotech stocks.
Size and listing are additional problems. Buffett and Berkshire Hathaway tend to invest in megacap or large-cap companies, and you won't find a single over-the-counter-listed stock among Berkshire Hathaway's portfolio of four dozen securities. The issue is that there's only one true large-cap pot stock (Canopy Growth), and a mere nine marijuana stocks trade on reputable U.S. exchanges -- albeit this figure is closer to one dozen if you count partial players, such as Scotts Miracle-Gro. There just aren't that many choices that Buffett would feel comfortable adding to Berkshire's portfolio.
Legality is yet another issue. Even though cannabis is legal medically and recreationally in Canada, and two-thirds of all U.S. states have given the green light to medical marijuana, it remains a Schedule I substance in the United States. In plain English, this means it's still entirely illegal, prone to abuse, and not recognized as having any medical benefits. It's unlikely that Buffett would consider investing money in an industry that's considered federally illegal in the United States.
In other words, the marijuana industry may have appeal to big-name investors, but Warren Buffett isn't going to be one of them.
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Sean Williams owns shares of Teva Pharmaceutical Industries. The Motley Fool owns shares of and recommends Amazon, Apple, and Berkshire Hathaway (B shares). The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.