Cannabis Investing

2 Minute Read

The Cannabis industry has been experiencing exploding growth as the drug continues to be decriminalized across the US, and its medical uses are expanding into more treatment programs for individuals.

This begs the question, should you invest in this young, but growing industry?  I took a deep dive into this question earlier this week through the lens of an Investment Advisor, looking into one of the most popular investments in this space, Alternative Harvest (MJ).

This investment is an index fund made up of roughly 40 publicly traded companies in the cannabis space, here are a few of my observations.

  • Most of the companies are losing money, yet they have billion dollar valuations.  This is not uncommon for a new industry; companies rushing to new markets to gain share and burning through a lot of cash in the process.
  • That said, based on studying the financials, these companies are pricing in huge increases in revenue and profits.  If they do not meet those numbers, their stocks could suffer.
  • Most companies are based outside of the United States, many in Canada.  International investing comes with additional risk due to currency fluctuations, and there could be some concentration risk with so many of these companies based in a single country.
  • Supply and Demand – High demand creates higher prices, and lowers potential future returns.  This is common for new, popular industries and could be one of the dynamics at play for cannabis investors today.

It a certain sense, this reminds me of the 1990s when the internet was first introduced.  While there were several companies that rewarded early investors, many others ran out of money and/or didn’t have a sustainable business model.  A couple of the most successful companies to come out of the internet era were the ones that were able to adapt and pivot through strong leadership.  Amazon started out selling books online, while Netflix was shipping DVDs to customers through the mail.

While several of these companies could turn out to be good investments, I would shy away from investing in high demand, new industries, and companies without track records of sustained earnings and profits.  There is just so much risk associated with these companies, I would prefer to stick with the companies in the S&P 500.

I hope this is helpful, as always if you have any questions please don’t hesitate to contact me at the office.  Have a great weekend!

Best,

Clint

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