What to Consider Before You Invest in Cannabis Stocks

As prices sink for various big-time cannabis companies, many retail investors may be interested in buying their first cannabis stock. The thinking goes, the cannabis industry won’t die off anytime soon, so the current prices offer an attractive entrance to invest in cannabis stocks.

Related: Coronavirus Pandemic Could Delay Cannabis Legalisation in Europe and the US

Still, first-time buyers must consider a wide range of information before opening their wallets.

In the following guide, Strain Insider will walk through the advantages, risks and how-tos for entering the volatile cannabis market. None of this is financial advice but rather tools to further your analysis if you want to invest in cannabis stocks.

 

The two tiers: recreational marijuana and medicinal cannabis stocks

Like any market, the cannabis sector has many moving parts. There are the growers who supply the raw plant, the various derivative outlets who process the plant and, of course, the electrical firms, gardening suppliers and so forth.

It will become clear that betting on cannabis isn’t just about betting on cannabis companies either. And if your intent is to be a profitable investor, then taking positions against cannabis may also be a good play. There are plenty of tools and financial products that can help you short the cannabis market.

Analysis of cannabis investing thus involves a deep understanding of the plant, its purpose and its place in the broader economy.

For more on that last point, consider how much cannabis, like other plants, relies on high-quality dirt. Yes, you can make money by gambling on dirt. But more on that shortly.

There are two principal tiers of cannabis stocks you can invest in.

The first is perhaps the most obvious and includes publicly traded companies like Canopy Growth Corp., Tilray Inc., and Aphria. Each of these companies does roughly the same thing, and digging into their differences is important.

But for the sake of this introductory guide, we can comfortably batch them together.

The second tier may include pharmaceutical companies like GW Pharmaceuticals or even smaller firms that are selling consumer products like creams, salves, bath bombs and so on. The latter is likely harder to invest in because so few are publicly traded.

Thus, investors would likely be entering at a very early, very risky stage. Interested investors would also need to meet certain regulatory standards to participate in a seed round.

A key distinction between this first tier of companies and the second is the distance each company is to the plant itself. Canopy is, for instance, very close to a lot of plants.

The Canadian firm has an estimated 520,000 square metres of grow space. The average yield per 0.1 square metres is roughly 100 grams. This puts the company’s output at roughly 520,000 kilos per year.

Related: How to get a Cannabis Growing Licence in the EU

It’s important to note that these figures are based on estimates from 2019. Many cannabis companies are notoriously tight-lipped regarding their exact production. If a companies business model is built on keeping prices lower by expanding cultivation, then the output of this cultivation is valuable information.

Also, a yield of 100 grams for every 0.1 square metres is far above average. A research report from Cannabis Business Times indicated that most cultivators produce between 20 and 60 grams per 0.1 square metres. 

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Canopy Growth recorded most of its growth following full legalisation in Canada in 2017. It is currently trading at ~€14.14 per share. Source: TradingView.

Comparatively, GW likely produces much less. This is because they have outsourced their growing operation to another company called British Sugar. GW instead develops strains that would be ideal for its medical products.

Before digging into the second tier, it will be helpful to understand how the differences between GW and Canopy are reflected in each stock’s price. For starters, each is taking on a much different market slice.

Seeing as GW is helping serve the medical community via its epilepsy and sclerosis treatment, the number of users is limited to these two maladies due to regulations. Canopy, on the other hand, is available to pretty much anyone (assuming the product is bought and consumed legally).

Related: The 15 Best Countries for Medical Marijuana

Canopy’s success relies on much larger, macro events. Whenever a new country legalises cannabis, for instance, one can expect that company directors will be on the first flight out of Ontario to mingle with new clients. Canopy also relies heavily on efficiency. It’s vital that a cannabis cultivator is maximising every square metre of its operation.

More broadly speaking, this is the critical distinction between medical cannabis and recreational marijuana. 

For GW to be successful, it must wait on cannabis regulations as well as further adoption of its medical products. If Sativex or Epidiolex ever earn mainstream adoption, however, the company will be very well positioned. GW’s bet is much more targeted.

This means that buying GWPH, GW’s financial ticker, also means that investors are making a bet on a very specific portion of the medical cannabis space. Informational baggage would include investing in all sclerosis and epilepsy treatments, not just cannabis-based varieties. It also means keeping a close eye on the medical community’s adoption of these kinds of products.

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At the time of press, GWPH is trading at €99.90 a share. Source: TradingView.

In the United Kingdom, where GW is based, medical marijuana is legal. Upon closer investigation, however, medical professionals are not prescribing cannabis to their patients. But even after mass adoption of such alternatives, GW faces other battles that could affect its stock price.

Related: The Legal Situation of Cannabis in the UK

The primary being the company’s ability to grow, manufacture and distribute its products at scale. This has been a notoriously difficult problem within any business that rests on an agricultural substrate.

Concluding, these two types of cannabis stocks have many differences, and it is important to understand them before you invest in cannabis stocks. Canopy more closely resembles a manufacturing plant that relies on consistent grows at scale. After that, the downstream effects of cannabis legalisation around the world will also be important for the company. This comes with a few caveats, of course.

GW is in a comparatively different market slice. The company must pay closer attention to the finer details of its products efficacy per patient, educating the medical community and ensuring that its supply chain is robust enough to handle an incoming windfall.

 

Looking beyond medicinal and recreational cannabis stocks

For all their hype, cannabis companies are like any other company. As such, this guide wouldn’t be complete without more traditional considerations tied to evaluating profitability. Large Canadian firms looking to acquire smaller, local outfits are doing much of the same.

In January, Carl Merton, Aphria’s CFO, told Strain Insider:

‘In Germany, you can’t be a small player. There are some serious challenges for how a German company would enter the medical space today. The real challenge for anyone who wants to be a cannabis company today is access to capital.’

Access to capital comes from having a strong balance sheet, a pro-management team, a long-term plan and a unique value-add in an already saturated market. Digging into each of these features is critical for giving a rough estimate of a stock’s potential.

A final, perhaps less risky way of betting on cannabis is through downstream ancillary services. Venture firms might call this the ‘picks and shovels’ stage of investing. For marijuana companies, especially large grow operations, this could be thought of as the lighting fixtures, pesticides and the companies that filter and irrigate a cultivator’s water.

One could even make bets on architectural firms that specialise in designing buildings specifically-designed for cannabis plants. In this context, there is also a case for betting on the entire gardening and agricultural industry.

Scott’s Miracle-Gro, a premium soil provider, has performed admirably simply because it has helped serve the seedling cannabis industry. Even if your cannabis thesis fails, you can still bet that amateur green thumbs will keep growing their summer tomatoes.

Related: Top 10 Grow Shops in Europe in 2020

Thus, even buying a bit of dirt could earn you some extra cash if you go about it the right way.

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