Should you invest in the cannabis industry?
The cannabis industry has seen an explosion of capital in the past few years. That might be the understatement of the year!
Investors have poured millions upon millions of dollars into the sector eyeing a prize valued at no less than a $22 billion industry. This prize is anticipated to be validated to investors with the upcoming legalization of marijuana the summer/fall of this year.
With the cannabis investing industry booming there remains some diversified ways to invest in order to capture your part of this buzz. But should you invest in the cannabis industry at all?
All investing is not without risk.
Origins and Uses
Let’s back up things for some context.
Cannabis is not a newly discovered plant; it’s been used across the world for thousands of years.
There are two subspecies of this plant: the first is known as Cannabis Sativa which is known as marijuana for its psychoactive properties. The second is known as Cannabis Sativa L. which is known as hemp; it is a non-psychoactive form of Cannabis used in manufacturing products such as oil and clothes.
For the most part, it was widely used for medicine purposes such as relieving pain during childbirth or for tooth aches and spiritual purposes. There are traces of Cannabis in Chinese, Indian, Tibetan and Greek ancient religions. For instance, Taoist shamans believed the plant had the ability to cast their spirit forward in time. They used cannabis in combination with ginseng to reveal truths about the future.
I doubt ancient societies could have predicted such a huge money-making industry.
The Medical Use
Since 2013, cannabis can be used legally in Canada by registered users who comply with ACMPR (Access to Cannabis for Medical Purposes Regulations) – but those regulations have also evolved.
Historically only registered users could legally use cannabis; to treat conditions and ailments such as pain management, appetite loss, nausea and arthritis.
Registered users increased from under 8,000 in mid-2014 to 130,000 by the end of 2017 according to Health Canada.
Health Canada also predicts this number will hit 400,000 by 2024. And this doesn’t even scratch the surface of the recreational market.
The Recreational Market
The recreational market (currently pending legalization) could surpass the combined sales of beer, wine and spirits according to a Deloitte report.
Not surprising if you look at the numbers from a recent poll commissioned by Oraclepoll Research Ltd. and Colin Firth:
- 26% of Canadians surveyed, or 7.5 million people, are admitted cannabis users
- 39% of Canadians surveyed, or potentially 11.42 million people, will consume cannabis products once legalized.
These numbers do not include those who would replace alcohol with cannabis.
Throw in the ancillary market with the growers, infused product makers, testing labs and security and you just added millions more to the industry tally.
Our government’s promise of legalizing cannabis gave rise to a steady stream of newcomers anticipating lower barriers to entry. Publicly traded companies looking to profit from the upcoming recreational market raised money in a green rush which saw valuations explode in the past few years.
I personally believe investing in this growth industry will prove challenging – there are so many companies positioning themselves as growers, distributors and ancillary providers – it’s almost impossible to know who might survive let alone flourish.
If my past history in trying to trade penny stocks in my 20s was any indication, a dumbass move if there ever was one, I believe not all of these companies will be winners. To invest in this industry at this stage requires thorough knowledge of each company – something I simply don’t have the time nor interest in.
Likely a better way of investing, should you invest in the cannabis industry at all, is via an Exchange Traded Fund (ETF) that holds a number of stocks in this sector.
As you know from reading my site, I’m a big fan of low-cost diversified ETFs. I use them to invest in the U.S. market and for international stock diversification. In Canada, not so much. I prefer buying and holding about 30 Canadian blue-chip stocks (many of them listed here) for dividends and long-term growth. (In doing so, I got a number of recent dividend raises thanks very much.)
With an ETF, at least you can indirectly hold a number of cannabis companies at the same time – you don’t need to worry about picking winners right now. Of course the downside to this approach is that you won’t participate in the success of the BIG winners to the fullest extent. Some of the “losers” and lower-performing stocks might remain inside the fund you selected and you’ll have no choice but to hold them as long as you own the fund.
In recent months a number of marijuana-themed ETFs have hit the market looking to capitalize on the burgeoning industry. More recently, there is an actively managed ETF from Evolve ETFs, and I suspect more of these products are on the way. This is only the beginning.
Like the hundreds of other actively managed ETFs that strive for alpha – to earn a return above the fund’s benchmark index – Evolve Marijuana ETF (ticker: SEED) uses a professional money manager whose full time job is to constantly evaluate marijuana companies, keeping only the ones with the most promise in the fund.
Will this Seed (as in Mark) invest in SEED the ETF?
Will I invest in the cannabis industry at all?
Should you invest in the cannabis industry? If so, in what company or fund?
I have to be honest – I don’t know and I can’t tell you. This is because all forms of investing, like I mentioned earlier, come with risk you must be comfortable with for your investing reward. Beyond that, you need to consider your investing objectives and identify what financial products fit into that plan – first.
While you might become very successful (read in wealthy) by investing in individual cannabis stocks or ETFs you could also see a huge downgrade in this sector and wind up with very little money in your pocket depending upon your investing behaviour gaps.
What if valuations are already through the roof? Could there be delays in the legalization process?
Anything can happen friends.
What I can say with some confidence is the cannabis market will be huge at some point and those companies in the space that are licensed and ready to produce, distribute or be ancillary providers will have some early advantages.
There are definitely risks that come with investing in this sector (just like any other emerging sector before it). Think about the early days of tech sector that included Apple, Google, Amazon; how did those pay off for some investors? As always, time will tell when it comes to investing.
What’s your take on this sector? Are you in? Are you ALL in? Are you invested in individual stocks or ETFs?