As recreational pot becomes legal, it’s natural to think about investing in the cannabis industry. Some people have already gotten filthy rich trading in pot stocks, but you are late to the party. Have all the profits already been reaped or should you join in?
Investment specialists say there is still money to be made, but even those bullish on the industry say stock prices in many existing companies are overvalued and investors must choose wisely to avoid getting burned in the inevitable correction.
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David Kretzmann, an industry analyst and advisor with Motley Fool Canada, who specializes in the cannabis industry, believes there are still good investment opportunities in the space. But he advises investors to focus on the performance of the underlying business and ignore short-term fluctuations in share prices. “Right now, the cannabis industry is still very speculative. You have some companies today valued at over $2 billion and they haven’t even sold anything yet.”
Kretzmann recommends investing modest amounts in a basket of companies to minimize risk, and plan to hold the stock for a minimum of three years. He looks for companies that do more than just grow marijuana. Companies with research and development arms, novel product lines and worldwide distribution partnerships have a better chance of building a larger market share, he says. Kretzmann also favours companies where members of the leadership team have invested their own money, always a sign of good faith.
Brad Poulos, an instructor at the Ted Rogers School of Management at Ryerson University, is considerably more cautious. He stops short of saying run away, but barely. “Are the big, huge monumental gains behind us? I think so.” Poulos says the current crop of cannabis companies have valuations far too high, relative to their sales and profits. And he believes a shakeout is imminent. “As it relates to the current, publicly traded companies, you’d have to be a really good stock picker to find the one that’s going to continue its meteoric rise.”
There may be some opportunities with new companies that come along, he says. “The industry is really just getting started. There are so many categories of product and companies that aren’t even allowed to exist yet in Canada.” Alcoholic beverage companies are already entering the cannabis market and Poulos predicts soft drink and candy bar manufacturers won’t be far behind, once edibles are legalized a year or so from now. He advises prospective investors to do their homework to find innovative private cannabis companies seeking startup funds. Local angel-investing organizations can be a good information source, he says. And to be safe, only invest modest amounts.
As the second country in the world to legalize marijuana, Canada is the industry’s investment epicentre. “All the biggest companies in the world are based in Canada,” says Kretzmann, citing Tilray and Canopy Growth as two examples. Even American companies, which are prohibited from raising money on the U.S. stock exchange, are trading in Canada, Kretzmann notes. “If Canada plays its cards right, it could definitely be a global leader for years to come.”