If you've been following the cannabis greenrush and wondering how to invest in marijuana stocks, then this is for you.
You have to have been living under a rock for the past 3 years to have not come across the cannabis industry, with most people just wanting to know how to in invest in marijuana stocks. The booming, global lifting of prohibition known as the green rush has been making waves for all the right and wrong reasons.
What started off as the most speculative bull run since the dawn of the internet, has come crashing back down to earth in the past 24 months. The sky-high valuations and hyperbolic share growth investors experienced over the 2016/2017 period are now confined to the annals of history.
The industry has matured (slightly), and although this maturity is starting to slowly lay the foundation for a stable and operationally-efficient global cannabis industry, it is still very nascent in its size and globally standardised regulations. But there are some keys as to how to invest in marijuana stocks.
Look to the North
The North American cannabis industry is – until Europe eventually opens up – still the largest cannabis market in the world. As legislative changes sweep through the US and cannabis becomes more commercially and socially accepted, the industry is ballooning.
Currently, public acceptance of adult-use cannabis at the Federal level has never been higher. A recent Pew Research study showed that over 67% of the US population want cannabis legalised. 11 US states have legalised for recreational use and 34 for medicinal. It is only a matter of time before the US legalises cannabis at the Federal level, and then it's game on.
Be Greedy When Others Are Fearful
The cannabis market has been decimated over the past 24 months. The Global Cannabis Index as operated by New Cannabis Ventures has seen a staggering decline of 46% over the past 12 months alone. Cannabis stocks have been so over-sold, that their relative valuations are now starting to become a little more palatable. It would seem that a bottom of some sort has been reached. However, this does not mean we don't think the market could still go down a little, but we believe the steep downhill slalom to be over.
If you haven't already invested in cannabis, now is one of the better opportunities to initiate a position, or if you're already a holder, to dollar average down your holdings. There is real value to be had out there. The key is to understand what you're investing in and then to try and pick companies that have the best chance. From there, let us guide you on how to invest in marijuana stocks.
It's Still a Speculative Game
If the cannabis industry were a game of baseball, then we are only starting the third innings (at best). Point being, we are still very early on in the game.
Because the cannabis industry is being born out of a history of hardcore propaganda, everyone is learning from the ground up. This makes investing in the industry even more speculative and risky, and it's important to understand, that even picking the best stocks at the time, does not mean they will be the cream of the crop in the long run. But there is no point in talking about the long run in cannabis, as it's just impossible to predict.
How to invest in marijuana stocks
- Look for companies that have strong balance sheets – cash is critical right now
- Look for companies that have real first-mover advantage
- Look to targeting late-stage value chain revenue
- Understand the "sector" a company operates in (as much as the company itself)
In keeping with the above, here are some suggestions on how to invest in pot stocks in the various sectors and markets within the cannabis industry.
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Medicinal cannabis has the potential to be the greatest healthcare disrupter of our time. Medicinal cannabis has been legal in Canada for over 20 years, and in California since 1996. Currently, 41 out of a possible 198 countries have legalised cannabis for medicinal use, with this number set to double in the coming 24 months.
In the US, 34 of the 50 states have legalised for medicinal use, and this number is also set to increase in the coming 12 to 24 months. Europe is really starting to accelerate its acceptance of medicinal cannabis, with the UK legalising in the latter part of 2019.
One of the best ways to play the medicinal market is Botanix Pharma. The Australian-listed entity, now operating entirely out of the US, is tackling the massively lucrative dermatological space. The company uses synthetic CBD to tackle the billion-dollar acne and atopic dermatitis markets, diseases that are inherently inflammatory-based.
Recreational cannabis is the area of the market that seems to really captivate retail investors. California legalised cannabis for adult-use in January 2018, and Canada became the first G-7 nation to legalise adult-use in October 2018. Although recreational legalisation is much smaller and less common than medicinal, with only 2 out of 198 countries having done so (Uruguay being the other), it is really starting to gain momentum.
To take advantage of the booming US recreational industry, one of the better ways to play this would be via one of the leading Multi-State Operators (MSOs). These companies operate in multiple states and are fully vertically-integrated in each state (as cannabis cannot be transported across state lines, given its current Schedule 1 status).
Cresco Labs is a leading US MSO, with 20 operational dispensaries, 14 cultivation facilities and operations in 7 US states. The company recently closed its acquisition of California-based distribution powerhouse, Origin House. This gives Cresco access to Origin House's leading distribution network and Origin's range of in-house brands that Cresco can distribute through their state dispensaries.
The Canadian Retail Landscape
On the 17th of October 2018, Canada legalised marijuana for adult-use at the federal level and in doing so, became the second country to lift the prohibition of cannabis. The recreational market got off to a very slow start and has underwhelmed investors for the past 12 months, albeit for two very good reasons. Firstly, Legalisation 1.0 only included flower and low potency oils, and secondly, there were very few retail stores open on Day One from which consumer could buy.
With the legalisation of edibles and extracts (high-potency oils) in October last year (affectionately dubbed Legalisation 2.0), the right products are now available in market, and the Provinces of Alberta and Ontario have resumed issuing licenses for new dispensaries (after placing a moratorium on them when supply was very restricted in the first months post legalisation.) As a result, the Canadian recreational market has never looked brighter.
We expect to see this area of the market grow quickly as more stores and economies of scale enable these retail-focused companies to start delivering big revenue.
One of the best ways to play the growing Canadian recreational market is a cannabis-centric retailer – Fire & Flower. They are the current market leader in Canada, with 43 open dispensaries and another 4 openings in Q1 this year.
In late 2019, the dedicated cannabis retailer completed a deal with Alimentation Couche-Tard which sees the company gain access to expansion-related capital and the potential to tap into one of the largest chains of retail outlets in North America. If you are wondering how to invest in marijuana stocks in Canada, then the retail market is a great way to bank on future growth, and Fire & Flower is one of the best positioned to capitalise on this growth.
The hemp-derived CBD market
In December 2018, President Trump signed into law the Farm Bill of 2018. The mammoth bill, updated and revisited every five years, governs all things agricultural. What made this bill special was the fact that it removed Hemp from its Schedule 1 status and legalised it for the purposes of commercial and industrial use.
Hemp and marijuana are to cannabis as lemons and oranges are to citrus. The difference is that the hemp plant has less than 0.3% THC (the stuff that gets you high) and is very rich in Cannabinoids (CBD), the compound most associated with medicinal cannabis and other mainstream health and nutritional products.
And with the legislation of hemp, came a booming CBD-derived product market. Overnight, CBD products were to be found on every shelf, so much so, that the FDA came out and insisted that companies not claim any medicinal benefit with these products. Although this has produced a "grey area" in the industry, the fact remains that CBD is here to stay and to be honest, we welcome stricter regulations which can only be of benefit to the market leaders.
And the undisputed leader of the industry is Charlotte's Web. Charlotte's Web products are made from high quality and proprietary strains of whole-plant hemp extracts containing a full spectrum of phytocannabinoids, including CBD. They are the number one CBD retailer in the US by both retail locations and market share. Currently supplying their CBD-derived products in over 9,000 retail outlets, they also have one of the largest cultivation capacity, with over 675,000 pounds of hemp produced in 2018.
If you are considering investing in the legal hemp industry in order to take advantage of a booming CBD market, then Charlotte's Web may be one of the best ways to do so.
The Companies that Don't Touch the Plant
Some investors would prefer companies that don't touch the plant at all. These companies – called ancillaries– are the pick and shovels of the cannabis industry. They include the software providers, logistics, security, consulting, media and various supplies and products.
One such company is KushCo Holdings. They do not cultivate, produce or manufacture cannabis, but rather are a B2B company that sells packaging and other accessories to other cannabis businesses. In addition, they also vape pens, hydrocarbons for extraction, and legal and consultative advice.
The company generates significant revenue through its vape division and with the recent vaping crisis that spread across the US, their quarterly revenue took a big hit. However, with the crisis dying down and people returning to the legal vape market, the company is set to grow revenues as they take advantage of new recreational states like Illinois and Massachusetts.
How to invest in marijuana stocks in an Electronically Diversified Way?
Some investors simply prefer to hedge their bets and minimise risk through diversity. If picking individual stocks in the sector is too daunting, then one might consider the Electronically Traded Funds (ETF). ETF's consist of a great number of stocks and give investors access to the broader market without the risk associated with picking individual stocks.
The world's largest cannabis ETF is the Horizons Marijuana Life Sciences ETF (HMMJ). With over $1.3 billion under management, this is the go-to ETF for most cannabis investors. Given the poor performance of the industry in 2019, the HMMJ declined significantly during the year, moving from a high of $23 in March, to a low of just under $9 by December.
Once again, given the massive sell-off, we believe that for investors looking for a passive and diversified investment in the cannabis industry, the HMMJ is looking like good value to initiate a position.
The Bottom Line
And there you have it, the Green Fund's guide on how to invest in marijuana stocks. Remember, this is a very opportunistic and speculative industry, and you should never invest all of your money into cannabis, and should also only invest an amount you can afford to lose. Check out the following articles that provide specific information on investing in shares, and a more robust overview of stocks and stock markets.
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