Cannabis investing is not for the faint of heart. However, with close to US$14 billion raised by cannabis and cannabis-related companies in 2018, it can be very lucrative.
Understanding the rapidly evolving market is key to developing an investment strategy in this burning hot sector. Unlike other commodities, the regulatory framework governing cannabis can be complex and convoluted, increasing the opaqueness associated with cannabis investment.
At this year’s Lift & Co. (TSXV:LIFT,OTCQB:LFCOF) Cannabis Expo in Toronto, industry leaders took part in two investment-focused panels offering analysis, insight and tips for investing in cannabis in 2019.
Erich Mauff, founder and president of multi-state operator (MSO) Jushi (NEO:JUSH); Rosy Mondin, CEO of Quadron Cannatech (CSE:QCC,OTC:QUDCF); and Craig Wiggins, founder and managing director of The Cannalysts, offered their takes on approaching the sector at the “Cannabis Investing 2.0” panel held on Saturday (June 8).
Wiggins noted that he is approaching investment this year cautiously, being very careful and paying close attention to trend analysis on US companies.
“We really look at financial statements at The Cannalysts. We look at (a company’s) pitch deck for undelivered promises and we track the pitch deck against promises, but right now I’m being very careful and deliberate,” he explained.
Mondin, who runs an extraction solutions company, sees potential in investing in her sector ahead of “Cannabis 2.0” legalization this fall, when edibles, topicals and a host of other cannabis, cannabis-infused and cannabis-related products will become legal in Canada.
“I’ve been kind of banging this extraction drum for four years,” she said. “We see the markets moving towards that. That is where a lot of the money is going now, so extraction is really that next play.”
Mondin noted that a variety of products that depend on the extraction space remain illegal in Canada. The federal government is set to deliver regulations on these products on or before October 17.
The aggregation of craft brands by legacy companies is another area of the sector that Mondin prompted investors to keep an eye on.
While Mondin and Wiggins track cannabis developments on both sides of the border, as the leader of an MSO, Mauff is focused on the US market, where states like California and Colorado dominate the narrative.
“It’s hard to break the US into one single play. I don’t think people appreciate the complexity of state-by-state regulation, not to mention a confused federal stance at the moment, but we continue to like retail, we like extraction and we selectively like cultivation.”
Mauff’s firm made its public debut on the NEO Exchange on Monday (June 10).
Investment interest in the US market has picked up as MSOs offer exposure to several states in the country. In a conversation with the Investing News Network, Richard Carleton, CEO of the Canadian Securities Exchange, said that in 2018 US-based marijuana firms raised C$3 billion.
When it comes to things that investors should consider when selecting the right stock or company, the panelists offered a diverse array of tips.
“If you’re an investor, you want to see sales growth — this is a growth industry,” said Wiggins. “After sales, (you want to see) gross margin, which is the profit after the production of your assets.”
For investors looking south of the border to plant their cannabis investments, Mauff suggested paying close attention to the integrity of the mergers and acquisitions process and to companies’ liquidity.
“Your overhead cannot get ahead,” he said. “When you look at some of these multi-state players, they’re all getting big, but wow are they burning cash and will have contingent liabilities coming down the road.”
Caution was also a recurring theme at the “Cannabis Investing 101: Choosing the Hottest Companies, Funds and Options” panel on Sunday (June 6).
Alex Blumenstein, co-founder at Leaf Forward; Elliot Johnson, chief investment officer and chief operating officer of Evolve ETFs; and Louis Kyron, editor in chief of CannaInvestor Magazine, all reiterated the value in practicing due diligence when selecting companies and wading through conjecture to get to the facts post-Canadian legalization and pre-American ratification.
Kyron spoke to the intrinsic worth of knowledge and how information is currency within the investment space. However, he said, understanding which data to use is equally important.
“In this industry, there is a lot of information you can find, but a lot of it is misinformation, and like with most things, high-quality information allows you to make informed decisions, whether it’s ethics or investing,” explained Kyron.
Kyron suggested various websites to use as information resources when making decisions, including company websites, exchange-traded fund websites, SEDAR, SEDI and the Canadian Consortium for the Investigation of Cannabinoids website.
Understanding volatility and mitigating risk stand out as key areas of focus for cannabis investors, Johnson pointed out.
“There’s no magic to it,” Johnson told the audience. “It’s a lot of work. You are going to look at a lot of companies. You might spend an hour or two on research and say, ‘Well, I still don’t really understand what’s going on.’ And maybe that’s a sign that you should move on and look at another opportunity instead.”
The ETF executive said sometimes trusting intuition may be an investor’s best bet when it comes to trying to decipher which stock is a winner and which is a dud.
“Trust yourself to be smart enough to figure things out and realize that public companies, along with investment funds, are required by regulation to report what they are doing in plain language to the investing public, and you need to make sure that’s what you are seeing when you are reading things,” said Johnson.
He also encouraged investors to be diverse in their cannabis stock selections. The biggest mistake he sees cannabis investors making is not investing broadly and instead taking on single-company risk.
“They want to find that C$0.14 stock that goes to a C$1 or C$10, but they forget that C$0.14 stock can also go to zero, or C$0.10, and that’s a much different experience.”
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Securities Disclosure: I, Georgia Williams, hold no direct investment interest in any company mentioned in this article.
Editorial Disclosure: The Investing News Network does not guarantee the accuracy or thoroughness of the information reported in the interviews it conducts. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence.