According to Micah Tapman, managing director at Canopy Ventures, some investors are at risk of letting the cannabis hype train get ahead of itself. He recommends shorting everything for now.
Speaking at MJBizCon INT’L in Toronto, Tapman gave a presentation on valuations where he discussed how to properly weigh risk in the cannabis market as opposed to other investment spaces.
“You need to understand your baseline risk,” he told the Investing News Network (INN) after the presentation. “To put cannabis into perspective … the reality is I could probably make 12 to 15 percent doing much less risky investing in other sectors.”
Tapman also addressed the major boom in cannabis investing in recent months, explaining that some public market investors may be letting their dreams get ahead of themselves.
“I would say short everything right now, because the hype is … we’re at the top of the curve. I can’t imagine that the reality is going to match the expectations of people who put money into the public market,” Tapman said when explaining what investors should know about his evaluation strategy. “I don’t see that reality being close to the dream that people are sort of talking about.”
Keys to evaluating cannabis companies according to Tapman
Many speakers at MJBizCon INT’L echoed the sentiment that the cannabis market is a rapidly evolving and changing environment, and that it will likely be wildly different in as little as a year.
Tapman highlighted this point when discussing how he evaluates which cannabis businesses to invest in.
“The team must be very, very agile. Mentally agile, skill level agile … we know the market will be different tomorrow than it is today,” he told INN. “The number-one way for an investment to fail is for the company to fail,” Tapman continued.
Tapman explained that he seeks teams that are capable of making adjustments to their business models and that can also pivot depending on the dynamics of the market.
With more cannabis companies starting to pursue international — including US-based — interests, he expressed some skepticism, saying varying regulations can put a damper on those efforts.
“It’s very, very challenging to see right now, the public companies; I can’t imagine any of them being a dominant US company,” Tapman said. “It’s not just learning how to do business in the US, which is hard enough, it’s also learning how to do business in all 50 states in order to become a dominant player there.”
Executives for the leading cannabis companies on the Toronto Stock Exchange have expressed interest in the US market, once the drug is completely legal in the country. Cannabis remains an illegal substance on a federal scale, despite several states legalizing its use.
Despite some of the challenges Tapman foresees for players in the cannabis space, he expressed confidence in ancillary businesses that find themselves in a position to thrive from marijuana’s recent market positivity.
“The two big ones are agricultural technologies, which has been an underrepresented area of technical development for a long time, and then the other big one honestly is supply chain management, which also has been underrepresented,” he said.
He explained that ancillary businesses leave room for innovation in the cannabis space that might not be seen otherwise, using Apple (NASDAQ:AAPL) as an example of a company with a successful supply chain strategy.
“They figured out how … to make the aluminum bodies, which then allowed them to sell a laptop for double the price of anybody else, which gave them the margins to get more research and development for really neat stuff,” he explained.
“We’re going to see similar types of innovation coming out of cannabis, whether it’s tracking the supply chain, packaging for eco-friendly stuff that we’re seeing now with the hemp-based plastics. Some really, really neat technologies are coming out around supply chain.”
Don’t forget to look for our coverage of MJBizCon INT’L, with show notes from the floor and exclusive interviews on INN. You can also follow us @INN_Cannabis for real-time news updates!
Securities Disclosure: I, Olivia Da Silva, 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.