Investing in the Cannabis Industry

- March 25th, 2019

Thanks to a budding legalization movement across the globe, shareholders are discovering the benefits of investing in the cannabis industry.

Investors are always looking for areas of growth in the overall public sector, and investing in the cannabis industry has proven to be a beneficial road to returns.

A budding legalization movement across the globe and an emerging US market set to create US$80 billion by 2030 have led many investors to be eager to invest in the space.

Here, the Investing News Network (INN) offers investors a closer look at some of the things to know about investing in the booming marijuana space.

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What are the benefits of investing in the cannabis industry?

Investments in the marijuana industry can offer those willing to participate in the risk some substantial gains in the long term.

Despite its budding status as one of the next great global industries, the cannabis market has proven to be a tricky one to navigate for investors, with a multitude of periods of volatility.

However, leading firms have been able to sustain rough patches to offer investors solid returns.

The cannabis industry holds many facets and subsections within itself — such as medical, recreational, retail, extraction and more — and a variety of marijuana companies have attempted to operate in a majority of these markets.

Investors in the sector are gaining multiple levels of exposure, even though the attention of the market first gravitated towards facility development and product sales.

Investors can also look at marijuana firms exploring methods akin to the biotech industry and working on the development of new-form medicines with elements of the cannabis plant.

Similar to the rest of the life science markets, stocks in this sector tend to apply a long-term approach due to the process of medical trials and drug developments.

Several leading firms in the sector have diversified into the biotech space by launching studies on the effects of medical marijuana and research looking at innovation in treatments using it.

Canadian market opens the doors to legalization trend

Canada became the first G7 nation to legalize recreational cannabis consumption and sales in October 2018 to go alongside its already established legal medical market.

During the lead up to this critical development, several firms reached out to investors through public listings.

Investors backed up the potential of a vibrant marijuana market fueled by massive facilities and appropriate licenses from the government.

Canadian firms have seen the advantages of first-mover status in the international sector, where these companies have acted as leaders and established relationships with burgeoning ventures in newly legal jurisdictions, such as Germany and Australia.

Canadian cannabis companies have seen a split in market attention, with the larger corporations with leading market share and substantial market valuations exploring all kinds of international operations and deals.

Other firms have placed a focus on the Canadian market, with an emphasis on retail operations, extraction services or even high-quality cannabis product sales designed for connoisseurs.

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The emergence of the Canadian market has helped leading firms solidify agreements, such as the partnership between Constellation Brands (NYSE:STZ) and Canopy Growth (NYSE:CGC,TSX:WEED).

The beverage giant, which owns brands such as Corona, Black Velvet Whisky and Robert Mondavi wine, is embracing the marijuana space and recognizing its potential in a global landscape.

US plays offer investors growth opportunities with emerging market

The cannabis public market has seen a rally behind the emergence of publicly traded companies that are based in and focused on the US.

These firms, called multi-state operators (MSOs), look to own and operate assets in states with favorable cannabis laws and have captured the attention of the market.

“I think that the US companies have the confidence of investors, and they’re going to be able to raise more capital,” Alan Brochstein, a cannabis researcher with 420 Investor, previously told INN.

The analyst said he expects to see more listings from the US in 2019 compared to Canada.

MSOs manage assets across the US legal markets, including production facilities, networks of brick-and-mortar dispensaries and portfolios of brands for the medical and recreational markets.

Nawan Butt, portfolio manager with Purpose Investments, told INN his firm has made the active decision to pursue US names over the past few months.

Greg Taylor, chief investment officer of Purpose Investments and portfolio manager of the Purpose Marijuana Opportunities Fund (NEO:MJJ), previously told INN the market was taken by surprise by the newfound emergence of MSOs, and that he expects to continue seeing a Canadian market share dominance.

“A lot of people going back a year really thought that the Canadian companies would have two or three years to get up and running in the Canadian market and then would be able to turn into the US,” he told INN. “I think the surprising thing to a lot of people is how fast these American companies have come on, and the MSOs have gone from being small companies or afterthoughts to actually being really big, established companies.”

The US market is set to face some uncertainty regarding law changes at the federal level. A sweeping federal legalization approach may be on the horizon, but, for now, the state-by-state efforts have captivated the markets.

International markets show the future of the cannabis industry

Similar to the attention in the US, as investors continue the pursuit for growth and gains in the cannabis market, the international route will offer a variety of opportunities.

Canadian firms have already established partnerships and even operations in jurisdictions outside of the country.

As part of its year-end results call with investors, the management team of licensed producer (LP) Tilray (NASDAQ:TLRY) said its attention is beyond Canada and onto the US and Europe.

The firm’s facility in Portugal, according to CEO Brendan Kennedy, is set to replace the efforts from the Canadian operations for the company when it comes to the supply of medical product exports in Europe at a lower cost thanks to outdoor and greenhouse crops.

Find out what experts are saying about the future of cannabis edibles

 
Read our new report on the 2019 Lift Cannabis Business Conference
 

The company, alongside other leading LPs such as Canopy Growth and Aurora Cannabis (NYSE:ACB,TSX:ACB), has placed heavy bets on the expansion of medical programs into European territories.

Australia is another highly evolved market for the marijuana industry. The country has also seen cannabis stocks on the Australian Stock Exchange (ASX) flourish.

In a recent report, Small Caps wrote that the ASX is poised to see even more cannabis-related listings throughout 2019.

The range of these stocks varies from purely Australian-related ventures to those with business affairs in Canada or other markets.

ETFs offer investors a chance at plays in the volatile space

With the rise of marijuana stocks, cannabis-focused exchange-traded funds (ETFs) have become centric to investing in the cannabis industry.

In the Canadian markets, investors have gained options in funds such as the Horizons Marijuana Life Sciences Index ETF (TSX:HMMJ) and the Evolve Marijuana ETF (TSX:SEED).

These funds offer a pool of marijuana stocks and can be either actively or passively managed. The exposure investors obtain allows an entry to the overall marijuana market without the dangers of only owning particular stocks.

As indicated previously, marijuana investments have proven to be susceptible to a heavy dose of volatility determined from outside sources.

Due to their collection of stocks, ETFs also fluctuate with market peaks and valleys, but allow for a more steady path in recovery compared to only owning a stock in turmoil.

The funds have served the market as an indicator on the state of the industry, showing the collective gains of a market set on growing.

The rapid shift in interest from investors to the US marijuana market has led one of the top ETF operators to confirm its pursuit of a fund with only US-related cannabis stocks.

Investor takeaway

While investments in marijuana have provided a variety of success stories and gains in the stock market, this industry remains at an early stage of growth for the participant companies.

As more jurisdictions are set to open the doors to the industry, and as existing legal ones refine their consumer base and allow more complex product offerings, investors can expect continued growth of the overall marijuana market.

Don’t forget to follow us @INN_Cannabis for real-time news updates!

Securities Disclosure: I, Bryan Mc Govern, hold no direct investment interest in any company mentioned in this article.

Editorial Disclosure: The Investing News Network does not guarantee the accuracy or thoroughness of the information reported in the interviews it conducts. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence.

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