Is Pot the Right Pick for Your Portfolio?

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Last updated on January 28, 2019 Views: 547 Comments: 0

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No matter what your personal stance on cannabis use is, the Canadian government’s recent legalization of recreational marijuana has opened up a slew of interesting—and potentially extremely profitable—options for stock-savvy investors.

But with new opportunities come new questions, and a hot debate around the country at the moment is, ‘Just how wise is it to invest in Canadian marijuana stocks?’ Recreational pot and even medicinal cannabis use are subjects fraught with contrary opinions, confusion and complex legal parameters, so it can be hard to figure out just how to invest in pot stocks, even for seasoned investors in other industries.

To help you see more clearly through the often confusing haze of marijuana stocks, we’ll take a close look at whether or not Canadian cannabis companies are really something you should add to your portfolio. We’ll also explore industry trends and look at some companies in the cannabis field that may have particularly high-earning potential. While no security is ever a sure winner, the more you know about this hotly debated stock option the more equipped you’ll be to make a smart investment.

Impact of Cannabis Legalization in Canada

As with any new and popular product that enters the marketplace, businesses will do what they can to profit from increasing consumer access and demand. The legalization of recreational cannabis, as well as the growing use of medicinal marijuana, means that both companies experienced in the cannabis industry as well as new pot startups will be a nexus for investment.

Cannabis Stock Prices

There has been a definite hot-then-cold-then-back-again trend in marijuana stock prices. This underscores their speculative, volatile nature and highlights the importance of treating the stock with caution and doing your research when it comes to investing. A September 2018 article in Bloomberg noted that “The industry is now worth more than C$80 billion ($60.6 billion). On the Toronto Stock Exchange, the market value of Canopy Growth Corp alone is almost C$15 billion, more than major producers of conventional commodities, including U.S. aluminum giant Alcoa Corp. Many companies are scrambling for production licenses and financing. Existing growers of medical marijuana are looking to build bigger and better facilities to acquire sought-after supply agreements.”

In the very same article, however, the piece is quick to point out that cannabis stock prices, despite such a positive emergence on the market, have now faced a significant slump. “Optimism has waned in recent months, however, amid concerns that market valuations have become too rich. The BI Canada Cannabis Index, which tracks the shares of 74 Canadian cannabis-focused companies, has slumped this year, after surging 172 percent in 2017.”

Yet despite the up-and-down history of the commodity, many experts have an optimistic outlook on the growth potential of pot (and hence, possibly cannabis company stocks prices). According to New Frontier Data, which is an independent analytics company specializing in the pot industry, the Canadian cannabis business has a bright future. “New Frontier Data projects the domestic Canadian cannabis market will reach (CAD)$9.2 billion by 2025.” The report also notes that “The Canadian legal market (domestic only, not including exports) is projected to be CAD$1.7 billion (US$1.3 billion) in 2018, growing to CAD$7.7 billion (US$6.0 billion) by 2025. Between 2018 and 2022, total legal revenue is forecasted to increase CAD$5.2 billion (US$4.1 billion).”

Banks and the Pot Industry

Of course, potential for growth is meaningless if companies have difficulty getting the capital they need to grow. In general, corporations looking to develop turn to banks for infusions of capital. But Canadian banks were—and generally still are—seemingly reluctant to invest in cannabis-related companies (even those specialising only in medical pot) because of the stigma still associated with the drug.

This changed somewhat in January of 2018 when the Bank of Montreal was the first of Canada’s Big Five banks to get into the cannabis industry, buying over five million shares in Canopy Growth Corp (a deal valued at approximately $175 million). A few months later, Bank of Montreal signed a loan deal valued at up to $250 million with Aurora Cannabis Inc, another big firm in the cannabis field.

The rest of Canada’s major banks have taken a more conservative, wait-and-see approach to investing in marijuana. It remains to be seen just how many of Canada’s major financial centers will embrace the pot industry.

Should You Invest in Marijuana?

Let’s cut to the chase: No one can ever say with absolute certainty that a stock is a sure thing. The smartest thing you can do as a potential investor is to carefully study the pros and the cons of adding Canadian marijuana stocks to your portfolio.

Benefits of Investing in Marijuana Stock

  • A Thrilling Ride: The Canadian pot industry is still in its infancy, and if you’re an investor who likes the adrenaline rush of the ups and downs of an emerging industry, cannabis is one of the most exciting stocks to own at the moment.
  • Room for Incredible Growth: With the US still not showing signs of legalizing recreational pot use at the federal level, Canadian cannabis stocks have a chance to grow exponentially as the country tries to corner the market in North America and internationally as well.
  • A Stock You Might Believe In: If you’re a “conscientious” investor who likes to intellectually and emotionally believe in the companies you invest in, then cannabis could be a relevant choice for you, depending on your interest and values. If you, a friend or a family member take medical marijuana, or if you support the use of recreational pot, investing in Canadian marijuana stocks is a chance to inject something you feel passionate about into your portfolio.

Risks of Investing in Marijuana Stock

  • A Dearth of Capital: Despite the Bank of Montreal’s seeming acceptance of cannabis as a viable investment vehicle, most of the other big banks have not followed suit. This could could make it difficult for pot companies to raise money, which would thwart development and expansion plans. Furthermore, the longer it takes for Canadian companies to raise capital, the greater chance there is that major companies in the US can take a leadership position in the pot market internationally, especially if pot if legalized there federally.
  • Too Speculative: Many financial experts are still treating pot companies with a great deal of caution, comparing the initial enthusiasm in investing in Canadian marijuana stocks as similar to the premature (and many financial experts would argue misguided) enthusiasm for bitcoin stocks.
  • Too Much of a Good Thing: As the market for marijuana heats up, more and more companies enter the arena in an effort to get a piece of the profit. An over abundance of producers means competition to secure a solid market share will lead businesses to reduce prices, eventually leading to a loss of profitability and a decrease in stock values.

The Middle Ground

Marijuana undoubtedly has a future in Canadian investing. It’s just difficult to tell how expansive and profit-generating that future will be. For those who want to take a more cautious approach to investing in Canadian marijuana stocks, a good solution may be to invest in more solid, established companies that are entering the marijuana market in more of a tangential capacity. These are businesses for which marijuana is not their main product but that have links to cannabis-focused companies. By investing in these pot-adjacent businesses, investors can experience the thrill of putting their money in an exciting new industry without having to take and all-or-nothing approach. We will discuss this option in more detail below.

How Can You Invest in Cannabis?

All this information about investing in Canadian marijuana stocks may seem overwhelming. But take heart: Whether you’re an experienced investor or just starting to develop a portfolio, the good news is that there are several ways you can buy cannabis stock. Just pick the approach that best aligns with your comfort level.

Via a Financial Advisor

If you have access to a personal financial advisor, be sure to ask their opinion before buying marijuana stocks. A popular option with many Canadians is to set up an appointment with an advisor from their bank. This route is popular because your bank advisor has access to many of your accounts and has a good picture of your overall economic situation and investment goals and thus can help you make an educated assessment about your financial goals and priorities. Whether or not a financial advisor is from your bank or is an independent advisor (the Government of Canada has a very helpful site on how to pick an advisor), they can offer an excellent face-to-face opportunity to speak to someone about investing in cannabis.

Use an Online Broker

If you’re a more experienced investor who doesn’t need a lot of hand holding, consider buying stocks via an online broker, such as Questrade. With an online broker, you can buy and trade stocks, bonds and ETFs on your own, when you want from the comfort of your own home via an online brokerage. Online investors have pros and cons. The main con is that, if you want advice for buying or trading a stock, online investors don’t meet with you individually, face to face, but rather speak to you over the phone. Thus when working with an online broker you’re unlikely to have one specific personal advisor, but rather a different adviser every time you call. This is an unappealing option for investors who like a personal touch or who are new to investing and feel they will need a lot of help.

However, online investors have been growing in popularity over the years because—for the very reason there is no personal, face-to-face contact—the fees are attractively low. This makes online brokers particularly appealing to people who feel comfortable with investing on their own, who will need minimal advice, and who want to keep fees to a bare minimum.

CompanyStock Price ($CAD)Invest
Canopy Growth Corporation37.80Invest with Questrade
Aurora Cannabis Inc. 7.14Invest with Questrade
Constellation Brands7.14Invest with Questrade
Scotts Miracle-Gro61.98Invest with Questrade
Horizons Emerging Marijuana Growers Index5.70Invest with Questrade

Approaches to Investing in Cannabis

There are a variety of ways to enter the world of cannabis investing. The most obvious way to invest in Canadian cannabis is to buy stocks in a company whose main product is marijuana. While putting your money in a business that derives most of its profit from pot is the riskiest way to invest, it’s also the method that can bring you the biggest rewards if the company you pick to invest in ends up being a profit leader in the marijuana marketplace.

If you’re still personally a little uncomfortable with the notion of investing in what was until very recently an illegal substance, or you’re doubtful recreational pot will really catch on, there are also some more indirect ways to invest in marijuana and still be part of the action.

Invest in Cannabis Companies Directly

Canopy Growth Corporation (TSE: WEED NYSE: CGC) 

In the small unassuming town of Smith Falls, Ontario you’ll find the world’s largest cannabis company: Canopy Growth. It produces both medical and recreational marijuana in a variety of forms, including the dried flower, oils, concentrates, soft gels and hemp. In 2014 it was the first marijuana company to be publicly traded in North America. It then made more headlines in January of 2018 when it was the first pot business to be shown support by one of Canada’s major banks, after BMO bought shares in the company. In May of 2018, the company had yet another first when it was the first marijuana company to be listed on the New York Stock Exchange.

Canopy’s stock took off when Constellation Brands, a huge international company that produces beer, wine and spirits, began showing an interest in a partnership with the company. Constellation now owns about 37% of the outstanding common shares of Canopy Growth and has hinted it’s looking into creating cannabis-infused alcoholic beverages. If those beverages take off, Canopy could have an especially profitable future.

Aurora Cannabis Inc. (TSE & NYSE: ACB)

Another pot company getting lots of attention is Edmonton-based Aurora Cannabis. It’s the second largest producer (with a capacity of over 500,000 kilograms of marijuana yearly) after Canopy. It produces medical marijuana in numerous forms at eight facilities, including a massive plant in Denmark. It has a large international reach and operates in 18 countries.

Aurora is poised for growth and just began trading on the NYSE in October of 2018. In August of 2018 Aurora entered into an agreement with Alcanna Inc. (the largest private-sector liquor retailer in Canada) to give Alcanna exclusive rights to launch retail cannabis stores under the brand name “Aurora” across the country. There’s also been some speculation that Aurora is in talks with Coca-Cola to create a cannabis-infused beverage.

Invest in Companies Partnered with Cannabis Producers

Another smart way to invest in cannabis, and one that carries less all-or-nothing risk, is to buy stocks in a company that is indirectly connected to a pot-producing corporation. For example, you could invest in a company like Constellation Brands. As mentioned previously, this international alcoholic beverage company has invested billions into Canopy Growth Corporation and thus gives stockholders of Constellation a way to invest in cannabis indirectly. In this way, investors will not get all the rewards of a very popular pot-only stock but will also not assume as large of a monetary risk, while still potentially enjoying solid investment returns.

Invest in Cannabis Suppliers

If you’re looking to wade slowly into the cannabis investment waters, another option is buying shares in a company like Scotts Miracle-Gro. Scotts sells soil, lighting and plant nutrients to a multitude of companies within the cannabis industry, so their success or failure isn’t contingent on one single business entity. This gives would-be pot investors a more secure way to add pot to a portfolio.

Invest in ETFs

Exchange-traded funds have been lauded by financial experts over the last few years as a smart and more economical way to invest in the stock market. They allow investors to invest in a bundle of pot stocks (thus reducing the risk) and have low MER fees.

Horizons Marijuana Life Sciences Index ETF was the world’s first cannabis-centered ETF when it launched in 2017. A recent article in the Financial Post reports that, since its release, shares have seen massive growth and have now surpassed the one billion mark in assets, which is an increase of 124% in share value.

Horizons also offers another marijuana-based ETF called the Horizons Emerging Marijuana Growers Index ETF. There are several other pot-focused ETFs worth investigating (again a reminder to speak to your financial advisor or online broker for recommendations for your specific needs) and more are likely to get added in the future as interest in cannabis ETFs shows no signs of abating.

See Clearly Through the Haze

It can be easy to get caught up in the excitement of investing in such a controversial, fascinating industry. The fact is that there are no simple answers and pot stocks are still highly speculative and volatile, with big ups and downs happening monthly, if not daily.

That being said, there’s no doubt that careful, well-researched investment in the nascent cannabis industry could yield big bucks. The important thing is to not get caught up in the hype and do your research to ensure that pot really is a good fit for your portfolio.

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