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There are a limited number of companies that can be added to a marijuana ETF.

INVESTORS CAN GAIN exposure to the cannabis industry by adding marijuana exchange-traded funds to their portfolio, as a growing number of them began trading in 2019.

The burgeoning market has hit several roadblocks, as some companies like MedMen (ticker: MMEN) burned through cash and ousted its founders earlier this year, while CannTrust Holdings filed for bankruptcy protection after it was found growing cannabis illegally.

The higher volatility that occurs in marijuana stocks makes them a riskier asset, and many investors turn to marijuana ETFs to gain exposure to the nascent sector and lower the amount of risk.

Several marijuana ETFs were approved by the U.S. Securities and Exchange Commission in 2019.

The AdvisorShares Pure Cannabis ETF (YOLO) began trading on the NYSE Arca in April 2019 and charges an expense ratio of 0.74%. This ETF provides a generous dividend yield of 7.26% and is actively managed with $45 million in assets. The ETF tracks Canadian and U.S. companies that are in the consumer products, health care and real estate industries. The top three holdings are Innovative Industrial Properties (IIPR) at 9.5%, Village Farms International (VFF) at 8.4% and GW Pharmaceuticals (GWPH) at 7.9%.

The first U.S.-focused marijuana ETF, the Horizons US Marijuana Index ETF (HMUS), began trading in April 2019 in Canada with an expense ratio of 0.85%. The ETF holds 30 U.S. companies and owns 11.4% in Green Thumb Industries (GTIBF), 11.4% in Curaleaf Holdings (CURLF) and 10.7% in Trulieve Cannabis Corp. (TCNNF).

The Cannabis ETF (THCX) began trading in July 2019 and owns 30 stocks with an expense ratio of 0.7%. The ETF is passively managed and tracks the Innovation Labs Cannabis Index. The ETF only has $20.7 million in assets but provides a dividend yield of 4.1%. The top three holdings are Aphria (APHA) at 7.9%, Cronos Group (CRON) at 6.9% and GW Pharmaceuticals at 6.4%.

Investors have increasingly turned to passively managed ETFs in all sectors because of the low fees and higher returns than actively managed ones. In 2019, passively managed funds reported net inflows of $162.7 billion, while actively managed stock funds reported net withdrawals of $204.1 billion, according to Morningstar.

Actively Managed ETFs Are Less Risky

Investing in passively managed ETFs in the cannabis industry can lead to problems, says Jason Spatafora, co-founder of marijuanastocks.com and head trader at truetradinggroup.com. Portfolio managers in actively managed ETFs have more control because they can divest companies at the first sign of a major problem, such as when Canadian regulators discovered that CannTrust Holdings was growing cannabis illegally, he says.

In passive ETFs, holdings in cannabis companies are only rebalanced quarterly.

Instead of adding a cannabis ETF to a portfolio, Spatafora, who publicly exited cannabis stocks in March 2019 and went short, recommends that investors create their own “index” with fewer companies since many of these funds are “holding a lot of garbage,” he says. “You want to be in companies that haven’t seen their all-time highs, have legislative catalysts to grow on and Canadian cannabis companies have too much risk right now. Investors are better served finding value on their own rather than buying them in an ETF holding a few gems, but mainly junk.”

The volatility in the sector during the past year has impacted the returns of stocks, says Michael Berger, founder of Technical420, a Miami-based company that conducts research on cannabis stocks.

“An actively managed ETF is a better strategy for this current market environment,” he says.

Investing Strategies in Cannabis ETFs

Investing in cannabis ETFs right now can be risky because volume in marijuana stocks decreases historically during the summer, Spatafora says.

“Now is not the time to invest in them,” he says. “It’s better to invest in them closer to August. There is still some downside right now. You can get a better price by being patient, and I’m forecasting an end to the bear cycle by fall.”

Another major factor against investment in cannabis ETFs is that the SEC prohibits ETF providers from owning shares of companies that directly touch the marijuana plant because it remains a Schedule I controlled substance, even though many states have approved both the medicinal and recreational use of cannabis. Many cannabis ETFs cannot hold shares of U.S. marijuana companies.

“You’re largely not going to have U.S. cannabis companies in ETFs because U.S. exchanges won’t list them because of the federal restrictions,” says Timothy Seymour, founder of Seymour Asset Management in New York and portfolio manager of Amplify Seymour Cannabis ETF (CNBS), whose top three holdings are GW Pharmaceutical at 12.85%, Canopy Growth Corp. (CGC) at 11.3% and Cronos Group at 8.2%.

The regulatory environment will likely change since the U.S. cannabis market is the largest in the world, he says.

“Ultimately, the U.S. will come up with legislation and some relaxing of regulatory rules as companies seek access to banking and the capital markets,” Seymour says.

The cannabis market is a “great consumption story because it is a very sophisticated consumer product with retail distribution that is over the top,” he adds. “The quality of companies that have stepped ahead of others and people working in the industry has come a long way. The level of sophistication and operational excellence is very different than what it was three to five years ago.”

The majority of cannabis ETFs own shares of Canadian companies that have already seen their all-time highs, Spatafora says.

The Cannabis ETF could be a good addition for investors, he says. While ETFMG Alternative Harvest ETF (MJ) has $581million in assets and a generous dividend yield of 7.25%, the passively managed ETF holds large positions of 10.7% in GW Pharmaceuticals, 9% in Cronos Group and 7.97% in Canopy Growth Corp. MJ does allow investors to buy calls and puts and short the ETF.

Investors should trade the stocks of Canadian cannabis companies instead of holding them as a longer-term investment, Spatafora says. The Canadian company Canopy was downgraded by analysts after taking charges during the fourth quarter and is now trading at about $16 a share, losing more than half of its shareholder value from a high of $49.91 in 2019.

U.S. marijuana companies have the potential for more growth because there is a larger customer base, but until more ETFs can add them, investors should be wary of investing in the current lineup of ETFs.

“Why do you want to be in an ETF forced to hold some of that junk when the U.S. market is way bigger than the Canadian market?” Spatafora says. “The state of Colorado did more in cannabis revenue in 2019 than the whole country of Canada. The growth is simply where the population is, and the United States is a target-rich consumer environment.”

Canada faces a large number of challenges since its marketplace does not have enough dispensaries open to customers compared with the volume of cannabis grown there.

“Canada has a lot of hurdles before they can really hit those numbers they were targeting in 2017-2018 when everyone was building giant grow houses based on ‘funded capacity,'” he says. “Another big issue these companies face is a serious lack of dispensaries to sell product in and more write-downs for acquisitions they overpaid for.”

Unlike U.S. companies such as Green Thumb, Trulieve and Curaleaf that are “putting up exceptional numbers and positive EBITDAs, the Canadian companies are nowhere near that,” Spatafora says.

The cannabis market is growing since many states considered marijuana businesses essential during the pandemic. By 2025, the industry will grow to $33.9 billion with a compound annual growth rate of 18.2%, according to a recent report by The Arcview Group, a San Francisco-based cannabis investment and research firm.

Author: Ellen Chang

Source: Money. US News: How to Invest in Marijuana ETFs

Growth stocks had a long runway in 2019, despite long stretches of volatility thanks to seesaw trade relations with China and a consistently strong dollar weighing on results. And as in most years, 2020 should provide plenty of opportunity for growth investments to thrive yet again.

If you’re wondering where to start your search, just zoom in on hot or emerging trends.

Mobile payments, for instance, are expected to account for one out of every four dollars spent on American credit cards in 2020. Software has firmly supplanted hardware as the technology sector’s driver thanks to the more consistent revenues it drives. And increasing sums are being spent on cloud computing, where remote servers are being leaned on to manage and process large troves of data.

Technology isn’t the only place you’ll find growth stocks in 2020, however. Advances in medicine make the health-care sector a source of high growth, too, and you can even find a couple pockets of explosive potential in the much-maligned retail industry.

Here, we explore the 11 best growth stocks to buy for 2020. Most of these companies were on pace to deliver double-digit revenue growth across 2019 – and each is expected to deliver sales improvement of at least 15% during the coming year.

Dropbox

MARKET VALUE: $7.4 billion

ANALYSTS’ OPINION: 11 Strong Buy, 0 Buy, 2 Hold, 2 Sell, 0 Strong Sell

Dropbox (DBX, $17.78) is one of many companies leveraging the cloud to make a buck. Specifically, DBX provides cloud-based file storage: Rather than, say, a company needing to absorb the hardware costs necessary to stash enormous amounts of data, they instead pay Dropbox a small, regular fee to store it in their servers.

Dropbox’s most recent quarter shows why it should be considered among the more promising tech stocks. The company’s 19% year-over-year revenue growth was better than the 18% improvement it showed in the previous quarter. Users numbered 14 million during the third quarter, which was better than FactSet’s consensus estimate of 13.89 million. Dropbox is squeezing those users for more money, too – each user paid an average of $123.15, which is 4% better than a year ago and higher than FactSet projections for $122.30.

William Blair analyst Jason Ader, who has an Outperform rating (equivalent of Buy) on the stock, says shares aren’t getting their due. “This evolution (of Dropbox’s tool) is years in the making,” he writes, “though it seems clear that instead of getting credit for the enhanced functionality of its new-and-improved offering, the stock is being penalized for fear of disrupting traditional user engagement and/or the sense that the company is moving in this direction only due to (file sync and share) commoditization.”

For 2020, Dropbox is expected to generate 15% sales growth, which analysts believe will translate into a 22.9% ramp-up in profits. Despite these expectations, DBX shares are a relative value in their space, says Bank of America analyst Justin Post (Buy).

PayPal

MARKET VALUE: $127.6 billion

ANALYSTS’ OPINION: 31 Strong Buy, 2 Buy, 6 Hold, 1 Sell, 0 Strong Sell

Payments provider PayPal (PYPL, $108.69) could see its revenue growth accelerate not just in 2020, but 2021 as well, at more than 15% on average, says Chris Kuiper, a senior analyst at CFRA. A growing number of consumers and merchants, including those outside of the U.S., are using PYPL as a payments providers; almost half the company’s revenue is derived internationally.

PayPal recently became the first foreign company licensed to provide online payment services in China, after it took a 70% equity stake in Chinese online payments firm Guofubao (GoPay). This is a coup, given that China is the world’s largest e-commerce market, with online sales expected to reach nearly $2 trillion in 2019, Kuiper says.

PayPal will continue to grow as more users pivot to mobile. Kuiper sees Venmo, PayPal’s mobile payment service, “continuing to grow over 50% to 60% year-over-year each quarter in 2020 by our estimates.”

“We note an increasing number of merchants accepting Venmo directly, such as Uber, Uber Eats, Grubhub, Hulu and Fandango, leading to monetization of the Venmo product as well as a way to keep customers inside of PayPal’s ecosystem,” he continues. “This reduces the costs PayPal must pay to the existing payment network operators like Visa and Mastercard.”

The analyst community as a whole believes PayPal will bolster its top line (revenues) by 15.9% in 2020, and send much of that to the bottom line (profits), expected to grow by 14% year-over-year. That puts PYPL among some of the best growth stocks among blue-chip companies.

Adobe

MARKET VALUE: $159.0 billion

ANALYSTS’ OPINION: 16 Strong Buy, 2 Buy, 11 Hold, 0 Sell, 0 Strong Sell

Adobe (ADBE, $329.64) is among those companies that have evolved from selling software in packaged boxes to consumers who might use that software for five or more years, to delivering programs such as Photoshop and InDesign via the cloud every year on a subscription basis.

The company’s fiscal fourth-quarter results were “solid,” writes Morningstar analyst Dan Romanoff. Revenues grew 21% year-over-year to $2.99 billion, “driven by strength across product lines, customer sizes, and geographies.”

“Adobe believes it is attacking an addressable market greater than $80 billion,” Romanoff writes in a more forward-looking note from a few months ago. “The company is introducing and leveraging features across its various cloud offerings (like Sensei artificial intelligence) to drive a more cohesive experience, win new clients, upsell users to higher price point solutions, and cross-sell digital media offerings.

“Adobe dominates the creative segment, and the acquisitions of Magento and Marketo solidify the firm as a digital marketing platform leader.”

Analysts remain more bullish than not on the stock, with 18 recommendations of Buy or better versus 11 Holds. And on the whole, they expect 17.9% revenue growth for the year ahead, as well as a 24.6% jump in profits.

Amazon.com

MARKET VALUE: $887.1 billion

ANALYSTS’ OPINION: 43 Strong Buy, 4 Buy, 2 Hold, 0 Sell, 0 Strong Sell

Amazon.com (AMZN, $1,789.21), a nearly $900 billion mega-cap Goliath, commands expectations on par with small, agile upstart growth stocks. Analysts are looking for 18.5% revenue growth and 30.7% earnings growth in 2020.

And the e-commerce star is expected to gain even more market share in 2020 as more people are likely to sign up for global Amazon Prime membership subscriptions, says Tuna Amobi, director and senior equity analyst covering media and entertainment at CFRA Research.

By 2025, Amazon Prime will have more than 250 million members and its advertising revenue will triple, says K.C. Ma, president of KCM Asset Management and a finance professor at the University of West Florida.

“The strong gains in ad, cloud and international margins may help offset the free one-day shipping for Prime,” he says. Long-term trends of cloud consumption should “propel (Amazon Web Services’) revenue even higher.”

AWS will benefit from more international users, including in India, and could see a “potentially sizable upside” despite competition heating up from Microsoft’s (MSFT) Azure and emerging players in the cloud services market, says Amobi, who has a Buy rating on AMZN shares.

“With further economies of scale at AWS, likely continued strong growth in digital advertising and an increasingly predominant growing e-commerce base of third-party sellers, Amazon seems to us well-positioned to further prosecute its strategic mix shifts toward higher-margin businesses in 2020,” he says.

Five Below

MARKET VALUE: $6.8 billion

ANALYSTS’ OPINION: 16 Strong Buy, 0 Buy, 5 Hold, 1 Sell, 0 Strong Sell

Five Below (FIVE, $122.51) is a discount retailer that sells items for $5 or less. It also was one of a few Black Friday winners, according to Citi analyst Paul Lejuez, who also likes Target (TGT) and T.J.Maxx parent TJX Cos. (TJX). Discounting is a clear common thread here.

One advantage that Five Below has is that its stores have plenty of Frozen 2 items, which are likely to boost sales in December, he says.

Camilla Yanushevsky, equity analyst at CFRA Research, writes that Five Below’s sales should rise by 21.2% and 21.4% in 2020 and 2021, respectively, as the company opens 150 new stores as well as “Ten Below,” a new section in the company’s brick-and-mortar locations. Consumers are estimated to spend more money per transaction “fueled in part by refreshed store concepts and placement of more impulse items in checkout areas,” she wrote.

As Amazon.com crushes other brick-and-mortar retailers underfoot, their store closures are an advantage to FIVE, Yanushevsky writes. She also believes shoppers will seek out more bargains if and when the U.S. economy weakens, benefiting Five Below. She has a $145 price target on the stock, reflecting the company’s “unique ‘Amazon-proof’ positioning and ability to quickly spot and capitalize on the latest trends, like fidget spinners.”

For the year ahead, analysts are modeling 21.4% revenue growth, which should translate into a 19.2% bump to the bottom line.

Salesforce.com

MARKET VALUE: $144.8 billion

ANALYSTS’ OPINION: 37 Strong Buy, 3 Buy, 3 Hold, 0 Sell, 0 Strong Sell

A cloud-based customer relationship management software company, Salesforce.com (CRM, $163.25) is one of the original cloud companies. The customer relationship management (CRM) specialist has improved its revenues by roughly 20% annually over the past five years. Wall Street is expecting 28% top-line growth in Salesforce’s fiscal 2020, which ends Jan. 31, 2020, and another 23% for fiscal 2021, which begins Feb. 1.

In a December note, Morningstar analyst Dan Romanoff points out that fiscal third-quarter sales rocketed ahead by 33% year-over-year and says the company demonstrated “strength in all clouds for the quarter, notably from Platform, which includes both Tableau and MuleSoft.”

“We think strong results are supportive of our investment case that Salesforce is a clear leader in digital transformation given their customers’ desire to have a 360-degree view of their own customers, and that a broadening portfolio should help drive exceptional growth for years to come,” he writes. “The excitement around MuleSoft and Tableau are obvious and seem to be contributing meaningfully to customer interest.”

Morningstar maintains a fair-value estimate of $186 per share and calls shares “attractive.” That falls in line nicely with Wall Street’s broader view on CRM: Forty of the 43 analysts currently covering the stock call it a Buy or better, and on average they’re targeting prices of $190.69 per share, or about 17% upside over the next year.

Sunnova Energy

MARKET VALUE: $972.5 million

ANALYSTS’ OPINION: 6 Strong Buy, 1 Buy, 0 Hold, 0 Sell, 0 Strong Sell

Sunnova Energy (NOVA, $11.58) is a Houston-based solar-panel and battery storage company that was founded seven years ago and went public in July 2019. It operates in 20 states and U.S. territories, and boasted 72,600 customers as of Sept. 30, 2019 – an increase of 15,600 from the same point a year ago.

Coverage early on has been unanimously positive, with seven analysts suggesting that investors buy NOVA shares. BofA/Merrill analyst Julien Dumoulin-Smith, for instance, initiated the stock at Buy in August, with a $15 price target, citing strong overall macroeconomic tailwinds and seeing growth potential beyond its existing assets.

Importantly, Sunnova Energy is positioned in a rapidly growing market. Roth Capital believes the residential solar market will grow 25% in 2020, providing NOVA with plenty of opportunity.

Sunnova admittedly is among the riskiest growth stocks to buy for 2020 if only because there’s little track record to analyze. We do know that its third-quarter revenues jumped by more than 20%, and sales for the nine-month period ended Sept. 30 improved by 23.7% year-over-year.

The company is unsurprisingly absorbing considerable net losses, but Wall Street appears to be optimistic on that front. Analysts expect annual losses to shrink from an estimated $2.36 per share in 2019 to just 16 cents per share in 2020. That should come on a 24.9% improvement in revenues.

DocuSign

MARKET VALUE: $13.2 billion

ANALYSTS’ OPINION: 11 Strong Buy, 0 Buy, 3 Hold, 0 Sell, 0 Strong Sell

DocuSign (DOCU, $73.70) “is becoming a verb,” Forrester Research has said about the electronic signature and cloud agreement provider. That statement invokes the ubiquity of Alphabet’s (GOOGL) Google – its dominance of search has resulted in many people using “Google” and “search” interchangeably.

DocuSign is another subscription-heavy business that generates most of its revenue from U.S. customers. In the company’s third quarter ended Oct. 31, for its fiscal 2020 ended Jan. 31, 2020, overall revenues shot 40% higher year-over-year to $249.5 million, including a 41% improvement in subscription revenues, to $238.1 million. The remainder of its sales came from “professional services and other.”

That quarter was enough to convince Citi analyst Walter Pritchard (Buy) to upgrade his price target from $72 per share to $85 in early December, implying another 15% upside from current prices. He says the quarter set up “higher for longer” growth potential in the company’s upcoming fiscal 2021, which begins Feb. 1, 2020. Several other analysts, including from JMP Securities and BofA/Merrill Lynch, upgraded their price targets following the report.

Analysts on average think the company will end its fiscal 2020 with 37.7% revenue growth and a massive 167% jump in earnings. For fiscal 2021, which will encompass most of calendar 2020, DocuSign is estimated to grow sales another 25.5% and pump its profits up by 70.8%.

Etsy

MARKET VALUE: $5.3 billion

ANALYSTS’ OPINION: 15 Strong Buy, 0 Buy, 1 Hold, 0 Sell, 1 Strong Sell

Etsy (ETSY, $44.67), a site that allows people to sell handmade and crafted goods, has worked on several fronts to attract more customers. For instance, it is encouraging its sellers to offer free shipping on purchases of $35 or more, and it’s making changes to its advertising platform that are expected to improve sales going forward.

Etsy is among the few bounceback plays on this list of growth stocks to buy for 2020. Shares were off 6% with a week left to go in 2020, hobbled considerably by a drop following a mere match of third-quarter earnings estimates and an upward revision to full-year guidance that wasn’t quite up to Wall Street’s expectations.

Nonetheless, the vast majority of analysts covering the stock are bullish on its prospects, including Citi’s Nicholas Jones (Buy). He believes that the recent selloff was overdone and that ETSY shares are a “compelling buying opportunity.” He is encouraged by the aforementioned Etsy Ads and free-shipping program.

Etsy won’t be lacking for growth in 2020, either, if analyst expectations are on target. The consensus estimate is for a 25.9% improvement in revenues, contributing to a 21.2% higher profit.

StoneCo

MARKET VALUE: $10.7 billion

ANALYSTS’ OPINION: 7 Strong Buy, 0 Buy, 6 Hold, 0 Sell, 2 Strong Sell

StoneCo (STNE, $38.57) is a Latin American financial-technology company. Specifically, it’s the fourth-largest electronic payments firm in Brazil.

It’s the kind of stock that typically would fly under many investors’ radar … if it weren’t for its status as a “Warren Buffett stock.” Buffett’s Berkshire Hathaway (BRK.B) had a stake in StoneCo when it went public in October 2018. It currently owns more than 5% of STNE’s outstanding stock, making it the company’s fifth-largest shareholder as of the most recent set of 13F filings.

Buffett is no stranger to fintech, given his storied investment in American Express (AXP), as well as relatively more recent purchases of Visa (V) and Mastercard (MA). But StoneCo represents a much more aggressive play at the intersection of electronic payments solutions (such as point-of-sale systems and e-commerce offerings) and emerging markets. Indeed, this purchase was actually prompted not by Buffett, but by Berkshire lieutenant Todd Combs.

StoneCo has been one of the best growth stocks of the past year, and is on pace to finish 2019 with 53.1% top-line growth and an 89.2% explosion in profits. Analysts expect more modest but still outstanding performance in 2020: 41.1% and 42.8% improvement in revenues and earnings, respectively.

Cantor Fitzgerald’s Joseph Foresi is among the believers, rating the company Overweight (equivalent of Buy) and upgrading his price target from $39 per share to $40. He thinks the company is well-positioned to gain share in Brazil’s “rapidly evolving” payments industry.

Exact Sciences

MARKET VALUE: $14.2 billion

ANALYSTS’ OPINION: 12 Strong Buy, 1 Buy, 0 Hold, 0 Sell, 0 Strong Sell

Exact Sciences’ (EXAS, $96.94) broader mission is to help people detect cancers earlier and provide guidance on treatment. But specifically, its main claim to fame at the moment is its Cologuard colon cancer screening test, which can be taken in the comfort of one’s own home.

The stock looked poised to be one of the best stocks of 2019, racking up gains of more than 90% by September. However, a plunge in sales across September and October sent shares reeling, and despite a December recovery, EXAS’ gains were trimmed to “just” 53% with a week left in 2019.

Cowen analyst Doug Schenkel has Exact Sciences among his best growth stocks to buy for 2020. He rates the company at Outperform and has a $130 price target that implies 34% stock gains over the next 12 months. He writes that shares are undervalued by 50% and calls EXAS his “favorite large-cap, growth stock pick.”

Another reason for optimism: Exact Sciences closed on its $2.8 billion acquisition of Genomic Health, adding the Oncotype DX line of breast, colon and prostate cancer tests to its portfolio. Schenkel is “increasingly positive on how much (Genomic Health) can help EXAS commercially and operationally,” and thinks that Exact Sciences’ “product pipeline is under-appreciated.”

You can question how “under-appreciated” Exact Sciences really is given blockbuster expectations for 2020. Analysts are forecasting a 95.9% explosion in revenues in the year ahead, as well as a considerable narrowing of the company’s net loss, from $1.62 per share estimated for 2019 to just 33 cents per share in 2020 – a nearly 80% reduction.

Author: Ellen Chang

Source: Kiplinger: The 11 Best Growth Stocks to Buy for 2020

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