Headline: Is it a Smoke Show?

Date: 1/1/2022

Body:  Ok.   Once again, I have to separate politics from economics, as much as possible.   One reader asked how she could invest in the cannabis growing economy.  So, please note that the growing, distribution and sometimes usage of cannabis is illegal under Federal regulations.  That said, she is asking a very good question.  And, I’m getting the munchies for information.

Introduction:  Currently, under Federal Regulation, cannabis growth, distribution and use are illegal.   But this is a reality that is likely changing.  Don’t believe me, a few points:

  1.  A few states (Colorado amongst them) have legalized marijuana within their borders.
  2. Many doctors have publicly told their patients that marijuana is illegal, and then tipped them off as to how to find it.
  3. My friend is a leader at a local community college.    He brought in people from all over the state, who are already growers or dispensary owners, and asked these knowledgeable people what a new employee should know before going to work for them.    Together, they fashioned the first cannabis-industry curriculum in the country.
  4. Already, it is thoroughly legal in Canada.

All to say, it is coming.   As it does, we must ask the obvious question: Can we make money on this?  And the answer is Yes.  Yes I think we can make some money on this, but one must be strategic.

Before you invest in ANYTHING, and especially the cannabis space, PLEASE do your own research, especially with respect to the following:

Legal & Political RisksPlease recall that marijuana is still illegal with respect to the Federal Government.   In addition to the inventory being risky, the number of banks that will lend to these entities is very low.  As stated before, legalization will most likely happen, but the timeframe is up for question.
Supply and Demand ImbalancesThis is yet to happen in the U.S.  But, in Canada, so many companies poured so much money into cannabis production, the price of marijuana has decreased substantially.   This is also likely to happen in the U.S. once legalization occurs.
OTC stock risksCannabis-based companies tend to trade on the OTC market and regulation is quite lacking.   This makes for a potentially highly illiquid market for those stocks, and selling them could be difficult.
Financial constraintsMany companies within the cannabis space are cash strapped, and will offer up new shares to get more money.  This could dilute the shares already outstanding.

Research is ESPECIALLY important when looking at the cannabis space

  1.   Research the management team carefully—Ask yourself, “Are they likely to have both the horticultural knowledge and business savvy to pull this off?”
  2.   Understand the company’s growth strategy and competitive position—How is this company proposing to grow (manufacture) more product(s) and can they effectively market and distribute this product?
  3. Look carefully at the company’s financial statements—Are they likely to get funding from banks or other sources?   Does the bulk of their revenue come from the cannabis-space industry they are supposedly in?
  4. Has the company offered several rounds of stock sales?—This could indicate significant dilution of shares, and indicate, in the future, that further dilution is probable.  To understand dilution, think of large pizza.  Cut into 8 pieces, the large pizza will likely satisfy 3-4 people.  But, if you cut the same pie into 16 pieces, when you try to feed more than 3-4, people, they will likely leave the table still hungry.

OK.   How to make money in this cannabis space.  As it strikes me, we have 2 areas of companies  to think of investing in.  They are as follows:

  1.  Growers and dispensaries
  2. Others.

Editor’s Note:   I have eschewed a couple of the stocks I have become aware of because they either appear on the unregulated OTC market (and may be illiquid) or they just didn’t seem like good candidates for investment.  Your judgement might differ.

Growers and Dispensaries

Firm NameTicker SymbolDescription
Canopy Growth CorporationCGCOn the plus side, they seem to have good financing.   Most of their assets are financial.   On the potentially negative side, only 1/6 of their assets are Plant, Property & Equipment, and I would expect this to be a higher percentage.  Also, a third (or so) of their identified assets are noted as Goodwill, and this concerns me a little.  Their Gross Profit percentage is lower than I would like to see.
TilrayTLRYThis appears to be a VERY new company.   Once again, the Goodwill and intangible assets represent a VERY large portion of the balance sheet, but perhaps this is par for the course in this space.   Despite their newness, they seem to have a decent handle upon their business model, and the gross profit is more in line with what I would expect to see.  They do seem to carry a lot of convertible debentures which could signal potential for future share dilution.
Aurora CannabisACBOnce again, Goodwill and Intangible Assets are high.   But, in this case, they seem to have a better Gross Profit percentage, and their Inventory account (Which we would expect to be quite high in this industry) represents a better portion of their assets.  They also seem to have some sort of financial arrangement in development with Cronos Group.  (Cronos Group didn’t make my list because they filed some late financials, and this caused me some discomfort.)

Is there any other Kind???

With sincere apology to Jack Nicholson, I try to quote his beloved character from A Few Good Men.   There is a bevy of other companies that make accessories and accoutrement for the growing and enjoying of marijuana.  But I have read many different reports on the subject, and   Scott’s Miracle Grow is a company that always crops up in these discussions. 

Are there other ways to play in the cannabis space that might be a bit safer?

Yes, you could choose to invest in a cannabis-focused ETF, or perhaps invest in a more traditional company that has either taken a large stake in a cannabis company.

What are the ETFs that appear popular?

ETF NameTicker Symbol
AdvisorShares Pure U.S. CannabisMSOS
AdvisorShares Pure CannabisYOLO
Global X CannabisPOTX
The Cannabis ETFTHCX
ETFMG Alternative HarvestMJ
Amplify Seymour CannabisCNBS

I mention these ETFs in no particular order and have undertaken to do no research into them.   They were recommended within the pages of the following sources.  Please be sure to note that these ETFs could also lose value (just like any stock) and you should carefully research them before you do any investing in them.

Other ways to invest

Anheuser-Busch In-Bev has formed a joint venture (no pun intended) with Tilray to make a cannabis infused beverage.  Slogan suggestion: This bud’s for you?

Constellation Brands (parent of Molson beer) has taken an equity stake (roughly 10%) in Canopy Growth Corporation with a view toward creating a non-alcoholic cannabis-infused beverage.

The Verdict

No matter how you slice it, this is a sector of the economy which is very risky.   If you do choose to invest, please be sure to do this investment with money that you can stand to lose because frankly, it could go up in smoke.  Most of the companies I briefly researched had losses or declining gross profits.   This could be due to the over-saturation of the Canadian market or it could reflect a decrease in disposable income attributable to the pandemic.    Most of the companies had significant assets within the Intangibles and Goodwill sections, and this could lead to volatility in valuation, or come from the buying of significant competitors.  On the other hand, it could blaze white-hot on fire.  One thing that seemed consistent is the volatility.   They are, usually, very young companies, dealing in a very complicated financial and political space, and their stock prices move around a lot.   So, bottom line is: Buyer Beware: There is sometimes a fine line between being Taken and tokin’.






Editor’s Note: Please note that the information contained herein is meant only for general education: This should not be construed as Tax Advice.   Personal attributes could make a material difference in the advice given, so, before taking action, please consult your tax advisor or CPA.

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