Want to Invest in the Cannabis Industry? Here are a Few Tips:
- Investments in the promising, cannabis industry have been a focal point for potential investors for some time
- Today, we'll look at the perspective of one financial analyst interested in this sector
"Greetings, readers! I'm glad to share my view on cannabis investing in the "Cannabis Capitalist" section, a biweekly publication on the Leafly platform. I'm an accredited financial analyst in Houston, USA, and I've been interested in the cannabis industry since early 2013. My goal is always to help investors identify genuine opportunities and avoid seemingly promising ones."
A lot has changed in the last four years. The number of better opportunities for investors grows daily, in line with the rise of solid businesses engaged in the cannabis market and open to investments. However, this doesn't mean there are no potential pitfalls in this field.
I've spent considerable time highlighting these aspects to my investors on the "420 Investor" platform, which focuses on publicly traded stocks, and on the "New Cannabis Ventures" portal, which covers both public and private enterprises.
I'll start with a few basic factors that should be considered before investing in a private or publicly traded company.
Private Matter: Required Accreditation
Investments in private companies can be a much better investment in terms of value-yield. The downside is that investors find it harder to sell their holdings - they are less liquid.
These deals are typically only available to accredited investors - meaning you would need to have at least one million dollars in assets, excluding your home, an annual income of 200 thousand dollars as an individual, or 300 thousand dollars as a family. Once you meet these requirements, you have access to these deals, where the minimum investment typically ranges around 25 thousand dollars, though under special circumstances, the amount can be lower or higher.
Gaining access to such deals is not at all easy, because investment banks needed to broker them are mostly reluctant towards the cannabis industry. You can join the "Arcview Investor Network" (https://arcviewgroup.com/investment/), an investment group, which is one way to address this challenge. This group hosts weekend webinars where three to five companies are presented. They also organize quarterly tours across several cities with physical presence. Arcview represents over 600 members, indirectly introducing pre-vetted companies seeking investors. It was through the Arcview network that well-known companies like Eaze and MJ Freeway obtained their first private funding.
Public Path: Open to Everyone
If you want to invest in public companies that are open to anyone and have a much easier and faster portfolio trading option - they are liquid, then you have over 550 different possibilities. That's exactly how many companies are publicly traded in the cannabis industry.
Don't expect to find them all on international exchanges like NASDAQ or NYSE. Almost all American cannabis companies I follow are traded "over the counter", meaning they can be purchased on-site or by phone, not on major exchanges. Many do not communicate with the Securities and Exchange Commission, which is always a warning sign for a potential investor.
This over-the-counter sector can be quite volatile in terms of price fluctuations. My own "Cannabis Stock Index" (https://www.newcannabisventures.com/cannabis-stock-index/), which is updated quarterly and currently tracks 50 different stocks meeting certain trading speed and price criteria, went on a wild ride in 2014 when Colorado opened doors for adult cannabis sales. The index rose seven times in ten weeks, only to fall back subsequently. In 2017, after an initial 35% boost, it lost around 44% of its value, leaving it down about 20% so far.
If you'd rather invest in a fund that invests in cannabis rather than selecting individual investments, you have quite limited options. I discovered one mutual fund (which I won't mention here), and there's one exchange-traded fund, the Horizons Marijuana Life Sciences Index ETF. It trades on the Toronto Stock Exchange under the symbol "HMMJ". This fund owns assets worth about 120 million dollars, but there are several reasons why I wouldn't recommend it. A few similar funds are set to enter the market in the coming months, so hopefully, we'll soon have better options for those who want to invest in funds.
3 Questions to Definitely Ask
In the four years I've been tracking cannabis company equity, I've learned a few things. Here are three questions you should ask before actually investing.
- Are there better options than these companies "getting a ticket"? Companies that grow, process, and sell cannabis products are popular among investors. However, these businesses operate in highly competitive sectors that could become "commoditized" in the future. This would mean their products would be indistinguishable from others in the sector. It's worth considering investments in auxiliary companies in this market that could remain long-term or reduce product production costs, thus remaining competitive.
- Are there any investment opportunities outside the United States? Cannabis investment is a global opportunity, and the United States, where cannabis remains federally illegal, may not necessarily be the best market. Canada has a rapidly growing market with federally legal medical cannabis, where cannabis is expected to be legalized for all adults by mid-2018. Germany is another potential opportunity. It has legalized medical cannabis and allows pharmaceutical distribution, with usage covered by health insurance.
- Is the company I'm considering investing in profitable? This is a relatively new question that can be asked of public cannabis companies. At New Cannabis Ventures, we update and share a list of companies on track to achieve a minimum profit of 10 million dollars. We've currently identified about a dozen such companies, and this list will certainly grow. Profit is just one criterion, but it's a nice starting point. Until this year, investors were forced to choose between companies promising many visions but very few actual results.
In summary: Investing in cannabis remains a risky challenge. For investors looking to profit from cannabis, the number of investment opportunities continues to grow. California's legalization in 2018, followed by legalization in Massachusetts, will continue to remove and undermine the stigmas surrounding cannabis. It should also help private and public markets for emerging companies and offer even better opportunities for cannabis investors."
Author:
Alan Borchstein
Sources:
Brochstein, Alan. "Investing in Cannabis? Ask These 3 Questions Before You Do." Leafly, 7 May 2018, www.leafly.com/news/industry/investing-in-cannabis-ask-these-3-questions-before-you-do.