Investors “More Focused” with Their Cannabis Plays, Expert Says

When it comes to the cannabis space, investors are more savvy about how and when they spend their money.

After an adjustment period in the sentiment surrounding cannabis stocks over the summer last year — leading companies to scramble for cash — industry experts warned the market would shrink as weaker players are forced to exit the space in the face of a barren equity market and stronger firms rise to more stable positions.

One analyst has said that isn’t the case, however, and though the market is down across the sector, there is still money for companies to get their hands on.

“The money’s there,” New Frontier Data Economist Beau Whitney said in an interview with the Investing News Network (INN). “It’s just not as free flowing as it used to be.”

Whitney, the vice president and senior economist at New Frontier Data, a cannabis industry analytics firm, said that in 2019 over US$10 billion had been invested into the North American cannabis market, according to his data, and the marijuana space was still ripe with opportunity.

The investing strategy before the pull back, Whitney explained, was largely based on a momentum play, not unlike the ramp-up to the housing crisis that felled the market in 2008.

He said that kind of play was most often seen in the Canadian licensed producer (LP) space as investors were more eager to sign onto a compelling story and possibility of market dominance in Canada and internationally.

“Now what’s occurring is that those investments haven’t … (led to) results in terms of profitability. And as a result, there’s been some pullback, saying, ‘Well, maybe the valuations of those Canadian stocks are too high relative to their revenue right now,’” Whitney told INN.

The economist called the cannabis industry an example of an “entrepreneurial event” in which early entrants were able to produce quick and elevated profits, encouraging more and more players to flood the space and thus reducing the amount of money to be made.

As margins declined and price competition rose, players began to take their investments out of the industry, he told INN.

Cannabis investors are much more discerning now, Whitney said, and are employing more strict requirements — including proof of a good business plan and an effective management, among other standards — before pooling their money into a potential cannabis play.

“I don’t see money drying up. I just see money being much, much more focused,” said Whitney.

The US poses a particularly appealing opportunity for those who wish to enter the cannabis market, in Whitney’s view.

Though only 11 states have legalized recreational cannabis consumption, Whitney explained that the sheer potential market size makes the US a key part of the North American cannabis industry. So far, 33 states have accepted the medical use of the drug.

More broadly, the quickly growing number of countries putting some sort of cannabis legalization in place, whether it be for medical, recreational or industrial use, means that new markets across the globe will be opening up in the years to come, Whitney said.

And the international market is already flourishing. New Frontier Data’s 2019 Industry Outlook put global cannabis expenditure at US$344 billion annually.

Whitney told INN that, with the pull back seen in the Canadian names, the market is nearing rock bottom. However, he added that the same, narrowly focused efforts from cannabis investors have worked as a sort of reboot for the marijuana space.

“Now everybody’s pushed that reset button and said ‘OK, the dynamics of the market have changed to where it’s no longer a momentum play or invest with kind of the shotgun approach,’” he said. “Now it’s targeted.”

Investor takeaway

Whitney said that for US investors, apart from demanding attractive business fundamentals for companies before investing, one “existential risk” with putting money into the space comes down to governmental regulations in the country.

He noted that the barriers, which include banking restrictions and high tax rates for cannabis firms, continue to push down on the market.

In Whitney’s opinion, an investor is best served by deepening their cannabis portfolio, which can involve looking into ancillary businesses, or the “picks and shovels” of the cannabis world.

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Securities Disclosure: I, Danielle Edwards, 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.