Motley Fool asks…..What were the investment managers at CalPERS thinking?
The article gors on to say
What’s not surprising
It actually makes sense that CalPERS would invest in marijuana stocks now. And not just because California claims the largest legal marijuana market in the world.
CalPERS has more than $350 billion to invest to fund the pensions of California’s growing number of retired former public employees. The pension fund’s investment managers have to look at all sources they can to generate solid returns. The reality is that the cannabis industry is rapidly expanding and presents an attractive investing opportunity.
Just look around the U.S. Thirty-one U.S. states have legalized medical marijuana. Ten states allow the legal use of recreational marijuana. Cannabis is projected to be at least a $22 billion industry in the U.S. by 2022 — double the estimated size of the market this year.
Look around the world, too. Canada recently legalized recreational marijuana. Mexico’s Supreme Court overturned the country’s ban on recreational marijuana. Thirty-one countries allow the legal use of marijuana in some form, including major economic powers Germany, South Korea, and the United Kingdom.
Acceptance of the medical benefits of marijuana has definitely grown. For example, the U.S. Food and Drug Administration (FDA) approved the first drug derived from the cannabis plant — GW Pharmaceuticals‘ Epidiolex — in June 2018. The U.S. Drug Enforcement Administration (DEA) even gave Epidiolex the least-restrictive controlled substance schedule allowed under current federal law.
But Insys and Tilray?
While CalPERS investing in marijuana stocks isn’t surprising, the huge pension fund’s choices of where to park its money are shockers. Insys Therapeutics and Tilray are perhaps two of the most unlikely picks.
Insys has lost nearly half of its market cap so far in 2018. Sales of the biotech’s opioid drug Subsys continue to fall. New cannabinoid drug Syndros isn’t generating anywhere close to impressive revenue yet. About the only good news for Insys is that the company reached a settlement with the U.S. Department of Justice over allegations of improper sales and marketing practices related to Subsys.
Many investors would probably conclude that Insys is a lost cause. So why would CalPERS buy this troubled stock? Perhaps because the fund’s managers like that Insys plans to sell off its opioid products and focus solely on cannabinoids. Still, there’s no guarantee that Insys will get a good price with the ongoing opioid epidemic in the U.S. CalPERS’ bet certainly seems to be a risky one.
Then there’s Tilray — perhaps the most dangerous big marijuana stock on the market. The Canadian marijuana producer has enjoyed a great year so far with its share price soaring close to 250%. But that doesn’t tell the whole story for Tilray. Just a few months ago, the stock was up over 600% year to date.
Tilray should benefit from the expansion of the global cannabis industry. However, an awful lot of that growth is already baked into Tilray’s share price. Tilray appears to be overvalued compared to several of its peers — and they’re not cheap.
In addition, Tilray’s shares have been even more volatile than many of the other leading Canadian marijuana stocks. That’s because Tilray’s stock float is very low and has attracted a lot of short-sellers.
Another reason to question CalPERS’ purchase of Tilray stock is that the company’s initial public offering (IPO) lock-up period expires on Jan. 15, 2019. Tilray insiders can sell their shares after the end of the lock-up period. It won’t be surprising if the stock drops significantly as insiders cash in at least some of their nice gains.
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