Don’t own pot stocks? Are you sure?

Institutional investors, pension funds step in

TORONTO • Last week’s wild ride for pot stocks, which saw shares of B.c.-based marijuana company Tilray Inc. fly above US$250 apiece at one point, before closing Friday at US$123, underlined that it is no longer just Canadian retail investors seeking exposure to the cannabis sector.

Instead, shares of Canadian-based cannabis producers are increasingly finding a home in the portfolios of three other kinds of investors: American, institutional and the possibly unwitting.

“In meteoric fashion, some of the now large cannabis companies have graduated from the (TSX Venture Exchange) to the (Toronto Stock Exchange), and in some cases the S&P/TSX Composite Index,” said the recently released 2018 proxy season review from Kingsdale Advisors.

“While this has created huge returns for seed investors, it has also dramatically changed shareholder bases: large cannabis companies have started to see a turnover from retail to institutional investors, who place more importance and scrutiny on board governance.”

“In fact, our analysis of the major companies in the cannabis space shows a considerable increase in the number of institutional shareholders: in some companies, institutional ownership has increased threefold,” Kingsdale said.

ETFS and other funds that track specific indexes are also helping to broaden investor exposure to the sector, though the holders of such funds may not even be aware they now have a cut of the cannabis business.

That’s because, as share prices of cannabis companies have shot up recently and their market caps have grown, those marijuanarelated equities have moved onto major stock exchanges — and then, into the holdings of funds trying to track big stock indexes.

The ishares’ Core S&P/ TSX Capped Composite Index ETF, for example, dates back to 2001, long before cannabis firms were hitting billion-dollar market caps. It aims to replicate the performance of that capped index, and has attracted assets under management of more than $4 billion.

It now counts leading Canadian producers Aphria Inc., Aurora Cannabis Inc. and Canopy Growth among its holdings, albeit just a small percentage of them.

Greg Taylor, portfolio manager at Toronto-based Purpose Investments, noted that the growing market caps of some Canadian cannabis producers have put them on the same level as the country’s biggest companies. “Indices that are built to track off of those really can’t ignore them anymore,” Taylor said.

Then there is another source of cannabis investor: the U.S., where moves by Canopy and Tilray to list on U.S. stock exchanges have attracted new investment.

“Despite obvious logic, we’ve seen U.S. retail investors pile into the U.s.-listed marijuana stocks,” said short seller Citron Research in a recent report on Tilray.

While Canadian investors have been dabbling in cannabis for a few years now, Taylor said the announcement in August that U.S.based alcohol giant Constellation Brands Inc. aimed to invest at least $5 billion in Canopy managed to grab international attention.

Yet those U.S. investors want in at a time when there is a dearth of U.s.-listed pot stocks to trade. “So I think you get a bit of a scarcity factor there,” Taylor said.

One of the voices sounding the alarm on pot stocks has been Jim Cramer, of Mad Money fame, who took note of the cash pouring into cannabis ahead of Canada’s legalization next month.

“Oct. 17 is not going to produce the ‘high,’ so to speak, that people think,” Cramer said Friday on CNBC.

“I think that there’s way too much money coming into this and prices are going to crater.”