The Key to Success for Cannabis Investors
The investment landscape in the cannabis industry keeps on changing and evolving. Big-shot investors having deep pockets have realized the potential of cannabis consulting in the quickly growing field of cannabis companies. This has also opened new possibilities in funding and diversifying a business. However, businesses with higher valuations saw a drop at the end of 2019 and many companies reported course corrections and layoffs at the end of the year. As the valuations become less speculative bigger and savvier investors are becoming active in the field. With the increase of opportunities, the cannabis business has many investors developing a gold-rush mentality. Investors have to tread carefully in this new world and make calculated investment decisions in the cannabis market. Here are some tips to minimize the risks.
Know your market
Generally speaking, the commercial cannabis industry consists of three kinds of businesses. The first type of business consists of growers and retailers. Members of this type of business include the major cannabis firms and the suppliers of cannabis seeds required for cultivation. Second, are the biotech companies that prepare the drugs that are derived from cannabinoids? Lastly, there is peripheral support. Businesses are making and supplying things from hydroponics to bongs and vaporizers, to lighting systems. The basis for mitigating the risks is to understand them fully. The cannabis industry has certain specific risks involved in it that sets it apart from other sectors in the investment portfolio.
Know the legal risks involved
One of the more glaring areas where risks are involved is the legal side of the cannabis business. Although things are looking great at the moment with many states moving the cannabis industry in the direction of legalization, there is also an air of more tolerance among the wider world towards it. But, you need to remember that it is a new market and there is always the possibility of a sudden clampdown if there is a reason for it. Cannabis is still officially illegal according to federal law. Although that is a moot point in a practical sense, the states have been allowed to do their own thing. But, there is federal legislation in place that says banks will be restricted in offering financial products while financing this industry.
Be aware of supply and demand
Supply and demand are significant concepts for an investor to take into account while they consider the evaluation of stocks. But for the cannabis industry, this concept is far from clear. When the state of Canada legalized recreational cannabis, the cannabis growers jumped at the opportunity and undertook massive expansions. A few months later they had to cut back their production. Can we predict a similar pattern in the U.S.? During recent times the share prices of a major cannabis producer Aurora plummeted by around 30% because of the forecasts of decreasing sales.
Without a shred of doubt, the cannabis marketplace is a unique market and there are certain specific risks involved in the field. However, do not allow this to blind you from the fundamentals. Some internal risks are just as likely to bite you. Therefore, before buying stocks you need to perform due diligence. You must analyze the management of the team, the company’s business growth strategies, and the financials involved. While investing in growers, remember that the businesses with smaller cost structures and that are more competitive are more likely to be sustainable in the long run. One of the most significant metrics to look for is the all-in cost per gram of cannabis.
It is a fact that the cannabis market is moving towards personalization and requires advanced technologies such as LED lighting for the cannabis cultivation centers. For instance, the customers are looking to place orders for cannabis containing a specific quantity of CBD and THC, and for plants that are grown according to a certain specification. This means that the cultivators that are capable of leveraging the agro-tech for producing designer cannabis can become increasingly popular moving ahead. The use of advanced business systems is another major consideration. All acquisitions from the cannabis investors have to take into account the fundamentals such as the use of the right software for accounting, sales, and logistics.
Know the market capitalization
The market cap or market capitalization is how a stock market sizes up an organization. The bigger the market cap the better established the organization is considered to be generally speaking. It is also less likely to go out of business. Some of the larger companies have market caps in the excess of $0 billion while the medium-sized organizations have market caps of around $2 billion. The smaller businesses have market caps less than $2 billion. These organizations are recognized as large, small, and mid-cap stocks respectively.
At the moment most of the cannabis company stocks fall in the category of small and micro market caps. Microcap companies are those with market caps less than $250 million. There are certain mid-cap stocks out there but there are very few or possibly no pure-play cannabis businesses out there having a market value in the excess of $10 billion.
Are analysts considering the business seriously?
There is a well-established investment research firm called Morningstar that covers certain cannabis organizations by using a qualitative analysis program. Some of the companies covered by this firm include Canopy Browth Corp, Aurora Cannabis, Curaleaf Holdings Inc., Cronos Group, Tilray Inc., and Green Thumb Industries. You can find thousands of company analysts on the web that hype certain stock over the other. However, you need to use a reputable source such as Morningstar for narrowing down the search.
Look for a Pure-play Cannabis business
This can be good or bad and depends on what you are looking for. With the cannabis industry heating up, the long-established organizations such as Abbvie Inc. and ScottsMiracle Gro have entered the marijuana industry in some way but they are maintaining their core line of business. These companies are often lumped together with the pure-play cannabis businesses that operate solely in the cannabis industry. Indirect cannabis organizations might be a safer alternative because they are better established. However, when you are looking to get in at the ground level of a young cannabis business it may not be the right alternative for your investment.