Don't let the cannabis bulls blow smoke in your face.
Legal-marijuana play ETFMG Alternative Harvest ETF (MJ) - Get Report rallied some 1.7% Monday on word that Canadian medical-marijuana firm Aurora Cannabis has agreed to buy rival MedReleaf for $2.5 billion. I'm using the strength to exit my MJ position at a small profit.
MedReleaf is MJ's second-largest holding, with a 6.5% weighting. That helped push the ETF up to a $30.64 close Monday, although MJ has been range bound between $28-$32 share for some time.
I've spent quite a lot of time since late last year researching the legal-marijuana industry. While I continue to believe that legal cannabis-related products will proliferate over the next decade, I've unfortunately come to the conclusion that there will be far less profitability for the industry than I initially thought.
That's because ease of entry into the marijuana business will likely materially reduce and commoditize pot prices. In essence, the risk of profitless prosperity is growing as legal-marijuana supply meets and eventually exceeds demand.
That might be great news for Cheech and Chong, but given cannabis stocks' current sky-high valuations, I expect today's bullish profitability forecasts to disappoint investors in the years ahead. I also think that pot-companies' stock prices will falter from their currently elevated valuations.
In addition to Aurora's stock-swap deal for MedReleaf. we also got word Monday that Canopy Growth -- MJ's fifth-largest holding -- has acquired the 33% of the BC Tweed Joint Venture that it doesn't own.
I'm using the ETF's strength on these developments to sell my MJ position, which I'd been buying on weakness. I'm also taking the stock off of my "Best Long Ideas" list, which I added it to in February at about $31 a share.
(This column has been updated with MJ's Monday closing price.)
At the time of publication, Kass had no positions in the stocks mentioned.