The marijuana sector has experienced highs and lows over the past few years, with some cannabis stocks performing better than others.
Both new and sophisticated investors are interested in the cannabis market, as legal marijuana has opened the doors for many new players in the industry looking to expand their investment options.
But before any investor makes the decision to buy shares in the cannabis stock market, there are a number of key decisions that need to be made.
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The goal of the Investing News Network (INN) is to educate investors and help them make decisions with respect to their portfolios. We asked experts in the cannabis industry key questions to better understand how to invest in a cannabis stock. Here’s what they said.
How to invest in a cannabis stock: Does the company have a license?
One of the most crucial — if not the most crucial — components of any cannabis company is the type of license it may hold or could be applying for in the future.
Following an arduous review process, Canadian companies can qualify to obtain licensed producer status from Health Canada. They can then make products for the medical and recreational spaces.
In order to capture the recreational marijuana market, a producer will need to sign a supply agreement with a province so its cannabis products can find a space on store shelves or online.
Going through the application process with Health Canada is intense, and the government body increased its initial requirements in 2019 when it announced that marijuana grower applicants will have to own a fully built site that already meets the health agency’s standards.
Health Canada said this decision was made because after reviewing its licensing process, the government found its resources were being mismanaged and elected to enforce stricter initial standards for producer applicants.
Sean Gercsak, an investment advisor with Canaccord Genuity Group (TSX:CF,OTC Pink:CCORF), said licensed producers in Canada enjoyed impressive share price gains during the ramp up to marijuana legalization in October 2018.
According to Mason Brown, a director with Stoic Advisory, licenses are good indicators of where a company may be located in the marijuana supply chain.
The knowledge of what type of license — if any at all — a company holds can paint a clearer picture of where it is heading and if it’s worth investing in.
“Depending on the stage of the licensing process, generating revenue could be anywhere from days to months to years away,” Brown said.
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How to invest in a cannabis stock: Does the management team have experience?
Like any other industry, an investor should have a solid awareness of a company’s management team. For marijuana companies, this is especially important given the emergent nature of the space, the quick rise in options of stocks to buy and their market capitalizations.
“These are people you’re entrusting your money to, and if you can’t be confident about that, then by all means, don’t invest,” Alan Brochstein, a cannabis financial analyst with 420 Investor, told INN.
Brochstein suggested the first thing an investor should find out about the people leading a marijuana company is their experience in the market and their relationship to the industry.
For his part, Brown said two key indicators of an experienced management team are that some members have “strong, large-scale greenhouse growing experience” or executive experience from the pharmaceutical world — preferably someone involved with the launch of a blockbuster drug.
“Is management only here to make money, or do they have previous experience on the other side of the table, where cannabis made a material impact on their symptoms?” he said. “Together, these give a strong backing towards management’s passion for the industry and building their company.”
As the variety of available cannabis products branches out into other subsectors such as edibles, beverages and wellness products, it’s imperative to have a few team players on the roster that are well versed in these industries inside and outside the marijuana realm.
While interest and excitement for the marijuana industry continues to grow, pitfalls are still present in the space for those investing in marijuana stocks. A strong management team can mitigate investors’ exposure to such risks.
How to invest in a cannabis stock: What does its capital structure look like?
Brochstein said a quick review of any public company’s financial sheets will provide a lot of information on its model.
As cannabis companies mature into a world marked by increasing periods of economic upheaval, a strong balance sheet is a must. In the midst of the COVID-19 crisis, Nawan Butt, portfolio manager with Purpose Investments, told INN that in the Canadian marijuana sector in particular, attention is shifting to the sales performance of public cannabis producers.
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Butt said in order to evaluate their ability to survive the pressure from this tumultuous time, he’s been dedicating a lot of attention to the balance sheets of public cannabis companies.
John Zamparo, an analyst with CIBC Capital Markets, appears to agree with this strategy. In a note issued to investors, Zamparo stressed that in times of economic uncertainty, investors should have “a hyper-focus on balance sheet strength,” which he believes helps in the long run to protect against potential downturns in the space.
Being cash flow positive and earnings before interest, tax, depreciation and amortization (EBITDA) positive, or at least on the path there, are positive signals for investors that these companies will have a better chance at accessing capital than their peers.
“Capital has been very challenging for companies lately,” Andrew Udell, a financial expert with the Cannalysts, said to INN. “Companies that have demonstrated earnings and demonstrated EBITDA-positive status are going to be able to access capital.”
How to invest in a cannabis stock: Does the company have strong branding and product visibility?
As the cannabis industry matures into more of a consumer packaged goods market, the experts are advising investors to look to companies that have mastered branding and product visibility. That’s no easy feat when you consider the myriad differences between the US and Canadian markets in terms of cannabis product promotion regulations.
The more successful companies will be those that can identify unmet needs in a highly competitive market. “There’s hundreds of different cannabis brands out there in the space, carving out space,” Leah Thiel, vice president of marketing at Indiva (TSXV:NDVA,OTCQX:NDVAF), told INN.
Thiel also pointed out that necessity of not assuming what works in Canada will work in the US. “We really need to understand the nuances,” she said. Understanding consumer brand awareness in a specific market also helps companies to convert that awareness into consumer loyalty, she explained.
In the fractured state-by-state US market landscape, smaller-scale companies are at a serious disadvantage when it comes to brand awareness and product visibility. Multi-state operators (MSOs) are better positioned to take on this challenge, but even they must still be strategic when launching products in new markets.
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How likely is it that a cannabis company can build its brand to a global scale on par with Nike (NYSE:NKE) or the Coca-Cola Company (NYSE:KO)? “I would say it’s definitely harder to accomplish, (but) it’s not impossible,” Thiel told INN. That reality will greatly depend on cannabis shaking its federal ban in the US and the further opening up of international markets.
How to invest in a cannabis stock: What is the company’s strategy and target market?
These questions add to the concept of how much room the company still has for growth. Investors should be aware of the size of the company they are looking at, its specific market and where it can go after its initial strategy has been completed.
Brown told investors to evaluate the company’s aspirations and how likely it is to achieve those. “Does the company want to be a massive player in a small pond or a small player in a massive pond?”
Dan Ahrens, chief operating officer and portfolio manager at AdvisorShares, told INN that he’s looking at MSOs that are preparing for the eventual changes in policy the federal level. “(MSOs) are anticipating those walls coming down,” he said.
In the US, MSOs focused on mergers and acquisitions (M&A) are experiencing the most growth as the fight to secure market share ahead of any potential opening up of the cannabis industry at the federal level.
“What MSOs are essentially trying to do is get ahead of the floodgates opening up because when a federal decriminalization of sorts happens … everybody can sort of come and establish themselves in the space,” Nawan Butt said.
The smart MSOs are targeting their M&A activity toward strong medical markets in which they have yet to establish assets. Charles Taerk, president and CEO of Faircourt Asset Management, told INN that more MSOs are employing an M&A strategy of buying single-state cannabis operators in a bid to increase their national footprint. “Everybody’s reaching out to acquire footholds in those growing strong medical markets,” he said. “They’re making an estimate on the relative strength of the different state markets. Because not every state is the same.”
On the international stage, major Canadian operators are considered the best positioned, but investors should consider this a long-term play. “When we look at the Canadian market, and the publicly listed companies that are in Canada, I think a lot of the value in those companies is seen in sort of long-term international positioning,” Kacey Morrissey, New Frontier Data’s senior director of industry analytics, told INN. “A lot of investors were looking at the Canadian market and that global strategic positioning for a longer-term play, and it’s just happening slowly.”
How to invest in a cannabis stock: In summary
As any investor can see, the cannabis market has a lot to offer now and in the future. In fact, the global cannabis market as a whole could reach as much as US$51 billion by 2025.
Investors interested in the area are encouraged to look around by experts like Aaron Salz, founder of Stoic Advisory, who said the unique marijuana industry is growing extremely fast.
“It’s not just a national movement; rather, it’s a global movement, with many large countries enacting regulations that will provide legal access to marijuana to tens of millions of people,” he said.
INNdepth
Want more details? Check out these articles for more INNdepth coverage:
- Ways to Invest in Cannabis
- Investing in Marijuana: What to Do Once You Buy In
- Marijuana Investment Conferences
- Top Cannabis Stocks Year-to-Date
Want an overview of investing in cannabis stocks? Check out Why Consider Investing in the Cannabis Industry?
This is an updated version of an article originally published by the Investing News Network in 2018.
Don’t forget to follow us @INN_Cannabis for real-time news updates!
Securities Disclosure: I, Melissa Pistilli, hold no direct investment interest in any company mentioned in this article.
Cannabis Market Could Reach $5.5B By End Of Year
Experts Weigh In On Our Exclusive FREE Report. Can You Afford To Miss Out?
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