The past six months have been brutal for cannabis investors.
The mainstream media will have you believe that the driving forces pushing cannabis stocks down are Canadian oversupply concerns or sky-high stock valuations in the U.S.
But that’s simply not true. The real issue affecting cannabis stocks is the ongoing vaping crisis.
This month, I’d like to dive into the real news affecting cannabis. After that, I’ll provide you with my favorite cannabis-related stock pick right now. Similar to Tim’s recommendation in the previous article, this stock will provide us with continuous income despite market volatility…
The Mysterious Vaping Related Illnesses
Vaping was originally pitched as a healthy alternative to traditional smoking. And it quickly became a massive global trend.
However, growing health concerns surrounding vaping have shaken up the market.
Let’s look at a few key dates.
On April 3, 2019, then Commissioner of the Food and Drug Administration Scott Gottlieb, MD, issued a statement regarding the “FDA’s ongoing scientific investigation of potential safety issues related to seizures reported following e-cigarette use, particularly in youth and young adults.”
On Aug. 17, the Centers for Disease Control (CDC) reported that they were investigating more than 90 cases of vaping-related illnesses in 14 states.
And by Oct. 8, the CDC said the number of lung injury cases associated with the use of vapes had grown to 1,299 and 26 patients had already died.
The most recent statement from the CDC says that neither the FDA nor the CDC has identified the cause of the lung injuries yet. The only thing they do know is that the illnesses are related to the use of vapes and e-cigarettes.
First off, an e-cigarette works in nearly the same way a vaporizer does.
“The e-cigarette investigation quickly bled over into the cannabis market.”
Meaning the FDA’s April 3 statement was a clear warning that regulators were beginning to dig into the potential dangers of vaping.
Now, when the FDA began looking into safety issues related to e-cigarettes, the assumption was that the crackdown would be contained to companies selling nicotine-based products that targeted kids, teens, and young adults.
This is perfectly understandable. Companies selling adult-use products should not be marketing to kids. And its those companies that should be put under the microscope.
But here’s the thing: The e-cigarette investigation quickly bled over into the cannabis market.
The Dangers of Under-Regulation
For years, the cannabis industry has asked federal regulators to help safeguard the industry by testing everything from cannabis plants to the devices used to consume THC oil and flower.
Most state-legal cannabis companies follow state laws. Meaning state-legal cannabis companies don’t manufacture cheap vaporizers that spew heavy metals when they heat up. They don’t use deadly pesticides on their cannabis plants. And they don’t use vitamin E acetate to cheaply thin the THC oil used in vaping devices.
But the illicit black market doesn’t play by the same rules. NBC News even commissioned a study that proved just how dangerous black market cannabis products could be.
On Sept. 27, 2019, a report surfaced detailing how NBC News commissioned one of the nation’s leading cannabis testing facilities to test 18 THC cartridges purchased from both legal and unlicensed dealers.
The three samples obtained from legal dealers in California contained no heavy metals, pesticides, or residual solvents like vitamin E.
Thirteen of the 15 black market samples contained vitamin E. And when CannaSafe tested 10 black market THC vape cartridges for pesticides, all 10 tested positive.
David Abernathy, an executive with the cannabis investment and market research firm Arcview Market Research, said this:
“The biggest legal marijuana market in the world is California – and the black market there is three times as big. There’s a huge market for what are now illicit cannabis goods, and they tend to be much cheaper than their legal counterparts.”
In time, I believe we’ll learn that the majority of the health issues being reported are directly connected to the purchase and use of black market vapes and cartridges. And if I’m correct, companies that produce vapes and cartridges for the legal market will see a huge surge in demand.
Unfortunately, in the near term, legitimate companies and their shareholders are seeing the value of their stocks decline while we wait for regulators to do what they should have been doing all along — regulating the industry and setting standards!
The good news? As investors, we don’t have to wait for the environment to improve to make money in the cannabis space…
Work Smarter, Not Harder
You see, buying shares of profitable companies with a strong track record during times of volatility and uncertainty has always been a recipe for success.
“We don’t have to wait for the environment to improve to make money in the cannabis space.”
And that’s why I want you to continue to invest in Altria Group Inc. (NYSE: MO) — a company that was founded 100 years ago has exposure to multiple adult-use consumer segments and has paid and raised its dividend every year for the past 50 years.
It’s impossible to say when the current vape-related crisis will improve. But with a nearly 8% dividend yield, you’ll earn a fantastic return while you wait for general market conditions to improve.
Now, I first recommended Altria Group to Altucher’s Investment Network readers in April 2019. Today, I’d like to explain why Altria is still one of the best companies cannabis investors can invest in right now…
To review, Richmond, Virginiabased Altria Group holds diversified positions across tobacco, alcohol, and cannabis.
Since 1919, Altria’s bread and butter has been tobacco. Its investments include well-known brands such as Philip Morris (the maker of Marlboro cigarettes) and U.S. Smokeless Tobacco Co. (the maker of Copenhagen and Skoal) and a 35% ownership stake in Juul Labs — the nation’s leading e-vaping company.
Especially in recent years, Altria has strategically moved into other vice markets.
On the adult beverage side of things, Altria owns the Ste. Michelle Wine Estates and maintains a nearly 10% equity investment in Anheuser-Busch InBev – the world’s largest brewer.
And while most U.S. tobacco companies aren’t quite ready to take the plunge into the cannabis industry, Altria recognized the long-term potential of cannabis early — and invested $1.8 billion for a 45% stake in leading cannabinoid company Cronos Group in early December 2018.
From Altria’s investments in tobacco and alcohol to its innovative approach in vaping and cannabis, Altria has been proactive in transitioning from traditional cigarettes and smokeless tobacco to the adult-use products that the modern-day consumer is in search of.
A Diamond From Ashes
Of course, considering the negative vaping-related news we just discussed, I’m sure you’re wondering where Altria currently stands.
As you might expect, Altria’s stock has lost more than 25% since the FDA released its April 3, 2019, statement. And the decline is nearly 100% attributable to its investment in Juul.
Let me explain.
In late December 2018, Altria invested $12.8 billion for a 35% stake in e-cigarette maker Juul. But the recent vape-related crisis makes it increasingly likely that Altria will need to write down the value of its investment.
Sure, that doesn’t sound great, but here’s the thing: The writedown would be a non-cash event and would likely have NO impact whatsoever on Altria’s dividend.
Even if the U.S. were to enact an all-out ban on vaping products, Altria would still continue to be a strong investment. Here’s what Morningstar’s Philip Gorham, CFA, had to say:
“We estimate that a vaping ban would lower Altria’s earnings per share by $0.03 in 2020, or less than 1%, but the impact would magnify to around $0.17, or 4%, by 2023.”
Let that sink in for a moment. Altria’s stock price has been crushed over the past six months — to the point that the stock’s dividend is hovering around an astounding 8%. And yet the extent of the Juul-related damage could amount to low single digits over the next few years. That’s nothing!
A Safe Dividend With Significant Upside Potential
Buying stocks that have been beaten down is tough — especially when the headlines read like a class-action lawsuit waiting to happen.
But here’s what you need to understand…
Altria does not own Juul, the company.
So even if Juul was to vanish into thin air under the threat of endless health-related lawsuits, Altria’s financial loss should be limited only to the value of its investment in Juul.
Bottom line: This is the time to tune-out the media-inspired hysterics. Instead, we’ll invest using stone-cold logic with an eye toward future stock appreciation and reliable quarterover-quarter and year-over-year dividend payments.
And before you think you’re the only one who sees this opportunity, the folks at Bank of America Merrill Lynch sent a note to their clients earlier this month stating that after running Altria’s financials through a stress test, their analysts believe concerns over a dividend cut by Altria are overblown.
And Morningstar, the firm we just mentioned, has a $58 fair value estimate on shares of Altria — 36% higher than current levels.
As such, I am reiterating my buy recommendation on Altria. If you don’t yet own this stock, now is a great time to add it to your portfolio.
ACTION TO TAKE: Buy shares of Altria (NYSE: MO) at market prices up to $45.
