As the year winds down, many frothed up stocks of cannabis companies dipped — here’s a way to roll up your investments going into the new year.

Dec 09, 2019 | 02:30 PM EST

Stocks quotes in this article: YOLO, THCX, MJ

Cannabis investors have had their patience tried this year as numerous company scandals and the vaping crisis conspired together to pull down stock valuations. Yet, many of these same investors continue to believe in the industry and don’t want to abandon their investments. One suggestion is to take a tax-loss harvest, but then reinvest that money into one of the cannabis industry exchange-traded funds that got launched this year.

Peter Wright of Intro-Blue Research, a company that combines artificial intelligence with independent research, recently wrote about the option of either taking capital gains earned in the broader market or cannabis losses and moving that money into an exchange-traded fund. While 2019 was not kind to the cannabis industry, 2020 has numerous positive catalysts that could be very rewarding. These include new sales in cannabis in Michigan and Illinois, and sales data from Canada, with edible and vape products coming onto the market.

Tax-Loss Harvesting

The analyst noted that if investors were in the broader market like the S&P 500 for much of 2019, then they would end up with a 22% year-to-date gain, of which 50% would be a tax obligation. Wright used the example of an investor in the 32% tax bracket and said that it implied a tax liability of $3.52 for every $100 invested. If you were a cannabis investor, it was a much darker story. The U.S. Marijuana Index is down 36% year-to-date. He mused that if an investor had 10% of her portfolio in cannabis in 2019, a typical portfolio allocation for a speculative investment, then the paper losses would be $3.60 for every $10 invested.

“With cannabis likely to find support soon, many investors do not want to sell out of their cannabis exposure, so one strategy would be to rotate within cannabis stocks to ‘harvest’ the tax benefit,” he wrote. “You cannot violate the superficial loss rule by trading from one asset to another identical asset. Shifting investments from individual cannabis stocks, or even on ETF, to another ETF would not be a violation. In this example, 33% of the tax loss would be avoided.”

Making the Exchange: Cannabis ETFs

When reviewing the available ETF’s, Wright chose the Innovation Shares Cannabis ETF<>, which uses the symbol (THCX) . He liked the monthly rebalancing, low expense ratio and pureplay cannabis focus. While all of the cannabis ETF’s have negative returns for the year, THCX was the lowest with a three-month return of -29.2%. The next was the Alternative Harvest ETFMG\ using the symbol (MJ) , which contains some tobacco stocks, was -29.6% for the last three months. The Advisor Shares Cannabis ETF using the symbol (YOLO) was -31.6% and the Horizons Marijuana Sciences ETF with the symbol HMMJ was -33%. The analyst also liked that the ETF had a low volatility compared to some of the top cannabis stocks.

Legislation on the Horizon

A review of the potential positive catalysts for 2020 also include legislation. There are two pieces of cannabis legislation that are making their way through Congress. The SAFE Banking Act, which has strong bi-partisan support and addresses the banking challenges for the industry, would be hugely beneficial to companies in the sector. The STATES Act, which focuses on the rights of states to pass their own marijuana laws, also has b-partisan support and, while it’s considered a little riskier for conservatives, the libertarians can get behind the legislation. Either way, one or the other is expected to pass within a year to 18 months, regardless of the impeachment or election process.

Another aspect that could bode well for the stocks is the massive correction in stock valuations. There was always a feeling that cannabis stock prices were frothy. Market caps in the multi-billions of dollars for companies only bringing in a few million in revenue was a sure sign of impending doom. Thus, the prices are more realistic now. Wright also suggested that cannabis stocks should be looked upon as recession-proof. Consumers are likely to find some way to make their purchase – as they would with tobacco or alcohol – whether there is a downturn or not. There’s an old adage in the cannabis community that goes, “Would you rather have weed and no money or money and no weed?”