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How to invest in cannabis stocks

7 min read

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How to invest in cannabis stocks
How to invest in cannabis stocks

The global cannabis markets are showing attractive growth in terms of sales, companies, products and opening of new markets through legalization in different countries. This situation attracts attention from Investors and posits a seemingly great investment opportunity with high growth and risk. Given this panorama, we share an approach that could be used as a frame of reference for initiation invest in the cannabis industry recognize the various risks.

1. Understand the types of products

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The first is to understand the main categories of existing products:

  • Medical cannabis products: The medical cannabis It is legal in most states in the American Union and begins with a prescription from a specialist in treating conditions such as anxiety, aches and pains, stress, and ache.
  • Cannabis products for adults: This category is focused on recreational products and its legalization penetration is lower.
  • Cannabis products for use Wellness:: This category is not recognized in relation to legal texts, but it is created and supported by various marketing strategies for the placement of products mainly based on CBD or for topical use that seeks a sense of well-being.

2. Know the different types of cannabis supplies

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  • Cannabis growers and dealers: These companies grow cannabis in greenhouses or outdoors, harvest the harvest and distribute it to the end customer either with their own pharmacies or as suppliers to the retailers.
  • Cannabis-focused biotech companies: These biotech companies focus on developing drugs with cannabinoids.
  • Companies that offer auxiliary products and services in the supply chain: These companies focus on providing raw materials for producers (lights, hydroponic systems, pots, packaging, logistics).

3. Understand the risks of investing in cannabis stocks

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All investments involve some degree of risk, and cannabis stocks are no exception as they harbor specific dangers:

+ Legal and political risk: While we can argue that the political risk will decrease as the world becomes legalized, we are currently in an environment where the way the industry will operate remains uncertain. We have a situation where cannabis company banking is not allowed in the United States because it is not legal at the federal level.

+ Imbalance between supply and demand: Due to the opening of new markets and the participation of new players in the industry, we can observe imbalances in supply and demand, which leads to producers having very high variability in their sales / profits, which leads to volatility in prices of the deeds.

+ Actions called Penny stocks:: Many of the titles we can currently find are taken into account Penny stocksThat said, its capitalization value is less than that of a company listed on the SP 500, and its stock price is typically less than $ 5. They have the property of not having a history that would make the market trust them and they are typically very volatile and speculative. In addition, they can have low liquidity, which creates risks of being able to get in and out at a certain price.

+ Financial risks: Many companies pursue the strategy of dominating the market. However, this usually means high upfront costs that affect profitability and cash flow. This strategy often results in rounds of capital raising via convertible bonds, which dilute equity and cause the share price to decline.

4. Various considerations for finding a stock

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  • Research of the management team and the company’s strategy.
  • Know the strategy and its competitive advantages.
  • Find a brand with a favorable financial position, ie low debt and positive flows.
  • Know the terms and conditions in which the company acquires debt. For example, if it raises capital through convertible bonds, that company has a higher risk of liquidation if those options are executed.
  • Companies at an advantage in terms of their production costs per gram.

5. How to control the risk

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Understanding your risk profile as an investor defines many of the answers to the question of how you control risk. It is important to define the term and the basic assumptions with which we make the decision. Currently, the actions of cannabis companies are viewed as risky due to their volatility and the short execution time of their strategy.

There are no doubt companies that are riskier than others, as well as funds (ETFs) that will reduce your risk by offering diversified baskets of cannabis stocks.

Regardless of whether you choose a specific stock or a diversified fund, it is important that you know the vehicle and define an amount that you can take a risk with.

6. Continuous monitoring of industry dynamics

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The cannabis industry is in its early stages and has made important changes to the legal and commercial framework of each country, with the United States undoubtedly the most representative.

It is important to timely monitor the stocks we purchase as well as the industry in general. Also, an example of something that can have a positive impact on the price and ratings of cannabis companies in the U.S. would be federal cannabis legalization. like the possibility of banking in the industry, which currently operates 100% in cash.

We are at the beginning of an industry that promises exponential growth. Good selection and monitoring should lead to good investment decisions in the medium and long term.

7. Invest and live in markets like Mexico

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Live assets are those in which you invest directly in the company. These investments implicitly involve much greater liquidity risk. That said, if you want to sell the stocks there is no secondary market to do it quickly. They are also often most profitable when your business model works.

From the company’s perspective, they are often looking for capital, synergies and specific investor profiles that they can use to leverage the business model.

In markets like Mexico, where we are at the beginning of the industry where investment project efforts begin to look for capital, it is very important to have a good understanding of the strategy and the parties involved in order to find the good projects and the Discard projects that are just that You want to raise money with quasi-fraudulent programs.

If you are an investor willing to get involved in the company’s journey and add something for value, this type of investment is hands down a great option to look for. If you prefer a risk without participation, equity investments are your best option.

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