It’s no secret that the cannabis sector is one of the hottest commodities currently out there, with companies rushing to be publicly listed to get in on the action.
Putting it simply, investor interest in cannabis –both sophisticated and those new to the market– is heating up, but before any investor makes the decision to enter this market, there are a number of key decisions that need to be made.
With that in mind, the goal of the Investing News Network (INN) is to educate investors and help make key decisions with respect to their portfolios. Here, INN asked some experts in the cannabis industry some of the most important questions every investor should ask to better understand how to invest in a cannabis stock.
How to invest in a cannabis stock: does the company have a license?
One of the most crucial–if not most crucial–components of any cannabis company is the type of license they may hold or a license they could be applying for in the future.
Following an arduous review process companies can qualify to obtain Licenced Producer status from Health Canada under the Access to Cannabis for Medical Purpose Regulations, this may give the company a visibility boost based on the fact that currently there are only 48 licensed producers in the country. The company may gain a recognition of solid business practice–at least according to the health agency.
The acquisition of a Health Canada officiated licensed producer status for a cannabis producer equals a boost in visibility and a certification of solid business practice–at least according to the health agency.
Sean Gercsak, an investment advisor with Canaccord Genuity Wealth Management who’s had experience raising capital for companies in this sector, said licensed producers in Canada have seen impressive gains in their stocks over the last 24 months.
According to Mason Brown a senior analyst with Stoic Advisory, licenses are good indicators of where a company may be located in the cannabis “supply chain.”
The knowledge of what type of license–if any at all–a company holds can paint a clearer picture of where the company 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,” he said.
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How to invest in a cannabis stock: does the management team have experience?
Like any other industry, as an investor the need to have a solid awareness of a company’s management team is crucial.
“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 elaborated, saying the first thing an investor should find out about the people involved in the administration of the company is their experience in the market and their established relationship to the industry.
Brown said two key indicators of an experienced management team include people who may have “strong, large-scale greenhouse growing experience,” or people with executive experience from the pharmaceutical world – preferably someone involved with the launch of a blockbuster drug of some kind.
“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 stated. “Together, these give a strong backing towards management’s passion for the industry and building their company.”
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 into the model of the company, such as warrants and options.
What’s more, Brown recommended that investors find out how many shares management holds, if they have been buying or selling their own shares, and how much capital the founders first put into the company.
Brown added that investors should check if there are dilutive securities and what their exercise prices are as well as the prices and valuations previous financings were done at if a financing closed recently. He also said investors should know if the shares have a free-trading hold period, it’s worthwhile knowing when that period ends.
Another important fact to know in terms of capital structure is if the company is currently facing any debt. This could prove important as the company continues working towards its goals.
Finally, investors might want to ask a company how much are its cash savings, and for how long will that keep the company afloat before they need to raise more capital?
How to invest in a cannabis stock: what are the company’s strategy and target markets?
These questions add to the concept of how much room for growth does the company still have. As such, investors should be aware of the size of the company, their specific market and where they can go after whatever their initial strategy is completed.
Brown asks investors to evaluate the company’s aspirations and how likely they are to achieve those. “Does the company want to be a massive player in a small pond or a small player in a massive pond?”
Brown said a big distinction–and often an easy way–to identify differences in companies is the medical -against- recreational aspirations they may have. Legal recreational use in Canada is slated for July 1, 2018, while the US is in the middle of a conflict of ideologies on marijuana from the states that have regulated and seek the revenue from this industry and Attorney General Jeff Sessions, who has asked funding to target the cannabis industry.
“If a company is only focused on the medical segment then its total addressable market is going to be smaller than if it wanted to participate in both the medical and recreational markets,” said Brown.
Gercsak approved of investors being speculative and taking a look at cannabis stocks that may have aspirations to enter the recreational market– only if they have a clear path to permitting and are well defined within the market.
How to invest in a cannabis stock: in summary
As any investor can see, the cannabis market has seen a tremendous boom, however, there has now been a “normalization” to the stock prices and the valuations of new companies. Gercsak said the industry as a whole is in a process of self-evaluation as it starts to wonder just exactly how much are these stocks worth.
A research report prepared by Deloitte indicated the base market for recreational marijuana could land anywhere in between $4.9 billion and $8.7 billion over the next few years.
Investors interested in the area are still encouraged to look around by experts like Aaron Salz, founder of Stoic Advisory, who said this unique 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.
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Securities Disclosure: I, Bryan Mc Govern, hold no direct investment interest in any company mentioned in this article.