Hot for Pot? Read This Before You Invest.

Backgrounder

Cannabis, and investing in the cannabis market, continues to be in the news as legalization for non-medical marijuana across the country approaches. This article looks at how the industry is taking shape and some of the questions yet to be answered. As with any new industry (and have no doubt that this is an industry and not the domain of backyard grow ops) there are opportunities—and risks that should be considered.

Leaving aside the entire issue of any health benefits for marijuana, there are still questions about how cannabis will be distributed throughout the country when the Cannabis Act comes into effect. There are also questions as to whether timelines for the sale of the product will be met, as well timelines for what products (from weed, to oil, and edibles) will be allowed to be sold.

On the practice management side, the consensus seems to follow existing rules regarding impairment from alcohol or other substances: that all who are in a workplace should not be impaired. In other words, if you can’t come to work drunk, you can’t come to work high. Of course, when impairment becomes addiction, and this is made known to the employer, a whole set of human rights issues enter the equation. These will be settled eventually through the court system, as will questions as to treating patients who might be impaired, and the level of impairment that affects either treatment or a patient’s ability to consent to treatment.

Now onto the investment side of the cannabis market, which is a little less murky but still involves many questions.

 

The Cannabis Industry Is Already Huge

Over the past couple of years, many Canadian companies have entered this area and have begun to establish themselves. Two Canadian companies now have a market capitalization (the number of shares multiplied by the price per share) which exceeds $5 billion Canadian. And the growth continues. The largest corporate takeover (to-date) in this sector was finalized in July, in a deal worth $2.5 billion, to create a company with over 1200 employees.

Furthermore, in mid-August, a brewing company announced it will spend $5 billion to increase its stake in a cannabis firm. This is reportedly the biggest investment in the marijuana industry to date.

The Canadian Securities Exchange (the first new stock exchange in Canada in decades) now lists dozens of cannabis companies and this sector is almost as large as the decades old mining sector.

Marijuanaindex.com is a data site that follows cannabis stocks listed on exchanges in Canada and the United States, following price data and news for literally hundreds of companies.

Canadian banks have been funding cannabis companies for many years.

Marijuana companies have been buying industrial buildings and building greenhouses around major markets in Canada, with some planned buildings topping 1 million square feet.

As with any industry, there are companies in a wide range of fields such growing the product, transportation, product development, consumption, sales, and marketing. Sales in other markets around the world are also being made by Canadian-based businesses.

In other words, this is not a shoestring operation.

 

What can be learned from the dotcom experience?

While the cannabis industry is very large, it is also relatively new. There are things you should consider before investing in any new industry.

Much like the experience with the Internet in the late 1990s, though a new industry has formed and may be growing, this does not mean that every company (and therefore every stock) in this area will gain. There will be companies that are winners, but many of these firms will disappear over time, just as many Internet companies didn’t make it into this century.

Despite there being firms that are mature enough to be traded on a stock exchange, there are also smaller companies whose shares are not listed on any stock exchange. The risks associated with these firms are even greater.

Again, using the Internet boom and bust as a proxy, expect that some of these existing firms will be bought out. While this can give you the investor a return on your investment, it can come at the expense of losing out on being a long-term investor.

 

Be aware of the “unknowns”

Even when the use of cannabis for recreational purposes is legalized on October 17th, this will still be a highly regulated business. However, it is still unclear what regulations will apply. How will the sale of cannabis be handled? How will consumers be informed about product attributes and availability? Health Canada has signalled that it will be enforcing provisions dealing with the sponsorship of events (music festivals and other events), and has warned current licensed producers of cannabis to not undertake any promotion that will soon be made illegal.

And with any growing business, there will be competition from other players around the world. Will foreign competition be allowed? In what form (production, sales, other parts of the supply chain)?

A few more points are in order:

Farming Isn’t Easy, or Cheap

Greenhouses are expensive to build and maintain. Land for cultivation near Canada’s population centres isn’t cheap. It remains to be seen what impact blight and disease will have on large scale operations, since they have yet to take place.

Again, this isn’t about growing marijuana in a backyard. These are major cultivation operations, that will be subject to all the problems any farmer experiences.

Retailing Anything Isn’t Easy

Despite some wild guesses being made by some stock promoters, the size of the market for recreational cannabis in Canada is unknown.

Also, there isn’t robust information about the demographics of buyers. (Are they young or old, are they one-time buyers or are they “sticky” as retailers call loyal customers?) Just as you can’t just apply retail data coming from the United States into Canada if you are selling anything from donuts to jeans, the experience in the United States (which is still unfolding) may not apply.

And finally, it is difficult to know at this point, how this industry will change over time. Will regulations become more burdensome or less as markets develop over the next five years or longer?

 

Summary

There are still many unknowns when it comes to the cannabis industry in Canada. If you are a do-it-yourself investor, it’s prudent to do your research and know your risk tolerance before you invest. If you are thinking of taking on a greater level of risk, contact a financial advisor to ensure you can do this while staying on track to meet your long-term goals. Cannabis investing is not the domain of one type of company in Canada. There are large firms that are exporting to world markets and have an investment track record. There are smaller firms that are newer and may today have a profitable niche in the growth/sales chain. The only certainty here is that the landscape will be different in five years than it is today.

 

The information contained in this article is of a general nature only and should not be considered as personal investment or financial advice or an offer or solicitation to buy and/or sell securities. While every effort has been made to ensure the information, including any opinions expressed, is accurate at the time of publication, its accuracy cannot be guaranteed. Market or other conditions may change and CDSPI and its affiliates accept no responsibility for individual investment decisions arising from the use of or reliance on the information contained herein. Investors should obtain professional investment advice regarding their personal circumstances before making any investment decisions.