November 15, 2018 05:01 AM RSS

What to watch out for when Buying a Weed Stock

  • Wall Street Rebel | James DiGeorgia
  • 11/06/2018 11:51 AM
What to watch out for when Buying a Weed Stock

All pot stocks are definitely not equal. Although a few cannabis companies have laid down a solid foundation on which a viable business can be built in the industry, others simply make promises and use the words marijuana and cannabis liberally in their marketing, but don’t have much to show for it. With recreational weed recently legalized in Canada, cannabis stock prices are likely to come down sharply. This will, unfortunately, mean that many of the weaker players will struggle to stay in the market in the coming year.


The manager of the Purpose Marijuana Opportunities Fund, Greg Taylor, believes that the winners and losers of the 135 weed companies that trade publicly in Canada will soon differentiate themselves. None of these have had to prove that they can create a great brand, execute, or even win, and this will become clear in the months to come when things change from being a paper-based concept to actual firms in a real industry.

There are several reasons why it is logical to wait a while before investing in this market, although now is a good time to research the various cannabis companies to determine if investing in weed stock in the future suits you.

Weed stocks have collectively been increasing rapidly in the last few years in Canada, and specialists believe this is just the tip of the iceberg for some companies. According to Taylor, the Canadian recreational market is worth about $7 billion, while the medical cannabis market size is approximately $2 billion, and that’s just the beginning. In the USA, spending on cannabis is expected to grow from $9.2 billion in 2017 to $47.3 billion in 2027.

The marked has been called the investment opportunity of a lifetime. Taylor is excited by the fact that it is possible that this new industry will be positioned and led by Canadians. He added that people have already gotten rich by investing in it and thinks everyone should be looking at it for portfolio growth.

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A Senior Vice-President and Portfolio Manager at Goodreid Investment Counsel, Brian Madden, is however worried by the FOMO surrounding the industry. He feels potential investors should consider the possibility of a total loss, much like the dot-com bubble that burst in the mid-to-late 1990s.

Investors that want to invest in cannabis stocks should do so with a clear understanding of the potential profits and loss. At this stage, it would seem wise to invest minimum amounts that you are prepared to write off and see it as a long-term strategy.

The process of buying a weed stock is the same as buying shares in any company. It can be done online through a discount brokerage, or through a bank or broker. The startup amount depends on the platform used, and some of these don’t have minimum requirements.

Before investing, there are a few things to evaluate:

Size Does Matter

If you want big gains, investing in one of the well-established Alt:[Picture:Marajuania Leaf]cannabis names will probably not give you the desired results. The leaders that have already emerged are generally more expensive, and though that may be a lower risk, substantial financial rewards are not likely.

While lesser-known names have a bigger potential for a big reward, this comes at a higher risk as they have not yet proven their viability.

Location

Although it is unlikely that supply will meet demand from Canadian recreational users in short to mid-term, supply will likely exceed domestic demand in the long term. At that stage, companies that can export will have a strategic advantage.

Europe could potentially become the single most significant medical cannabis market globally with more than 739 million people, spending more than $1.5 trillion on healthcare. For recreational spending, however, the USA presents the largest opportunity, but also the greatest risk.

28 states in the USA have legalized medical weed, and recreational cannabis is legalized in 9 states plus the District of Columbia. Pot is however still illegal at a federal level. This means that most cannabis companies can’t access traditional banking services, including loans. Although Trump said during his election campaign that cannabis regulation would be left to individual states, the administration seems to have reversed its view on this issue. Reports indicate that they may have launched a secret anti-weed committee. Experts are of the opinion that this prohibition limbo will likely linger until 2019.

Management

When investing in any company, you should know the type of management team running the show, and that includes the cannabis industry. Experience running a similar operation and a solid track record are two things to look out for.

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The CEO of Grit Capital based in Toronto, Genevieve Roch-Decter, says the three-year bull run in the cannabis market has attracted some shady characters. Ex-investment bankers see that there is much money to be made and make empty promises while they’ve never grown a plant in their life. Be aware of these characters that are out there for a money grab.”

Licensed or not

All cannabis companies that want to supply the domestic market have to get a license from Health Canada. The more than 200 companies still waiting for a license are a riskier proposition. Previously, a company’s stock would pop when they got a license, but that’s not the case anymore due to the sheer number of companies wanting to get into the game.

Price

As with any stock, whether you’ll make a profit or not depends on the price you buy it at, and how fast that price will increase. It is tricky to value cannabis stock because the companies often have not yet reached their full potential. You can do some simple math to determine the valuation and can then use this framework to compare different stocks in the industry.

Calculate the market cap by multiplying the current share price by the total number of shares outstanding. Divide this number by the expected revenue in two to three years. If that number is between 2 and 5, the deal is promising. If the number is however between 10 and 20, the risk is very high, and it might be best to steer clear.

If all of this sounds like too much hard work, it is possible to hedge your bets by buying a basket of weed stocks. These are bundled together in an index fund or an ETF (Exchange Traded Fund) or. These are purchased like any stock but represent a group of companies, rather than a single one. ETFs are generally managed for you, and a portfolio manager will keep track of how the weed stocks are doing. Fees for ETFs are also typically much lower than what they are for a typical mutual fund.


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