The so-called Green Rush would have us all thinking cannabis investments are a sure way to cash in on the legal weed industry. However, the nature of the cannabis stock market is much more variable than get-rich-quick fantasies seem to suggest.
"Cannabis investing is very similar to investing in any developing industry. It has risks," Jeffrey C. Friedman MD - president and chairman of Zodaka universal payment platform - told Civilized. "The internet stocks in the early 2000s when the dot com boom and bust occurred were similar. Many companies were undercapitalized and poorly managed. Yet from that time came companies like Amazon, Google, et cetera."
Friedman is among a handful of brave investors willing to endure the literal ups and downs of an uncertain market as the industry and investors adjust to the uncertainties of state and federal legislative change — and the economic responses to both promising and discouraging cannabis policies.
"Prior to a year and a half ago there were very few cannabis stocks that were credible to trade on the market, you only had some of the biotech companies like GW Pharma and a few Canadians, as well as a lot of questionable companies that a lot of people considered to be pump-and-dump, or very speculative," Scott Giannotti - founder of the Cannabis & Hemp Association and CEO of Agricultural Evolution International, Inc. - told Civilized. But over the past 18 months, there has been a huge flurry of IPOs and companies coming onto the market for the first time which are legitimate, licensed cannabis companies or well-known ancillary businesses among industry folk.
Some companies to look out for, Giannotti recommends, include Elixinol, Isodiol, CW Hemp, PotNetwork, Aurora, Canopy Growth, Aphria, MedMen, iAnthus, Curaleaf, Trulieve, Tilray, and GW Pharmaceutical.
However, even with reputable, reliable companies coming onto the market, investing in cannabis stocks is still a volatile and risky game. No one is doing this to make money, at least at first, Giannotti says.
"This is a sector that you own for a long time," said Thomas George - president of Grizzle. "We're talking a five plus year vision because with cannabis, it's high risk. If the overall stock market is down two percent, cannabis stocks could be down six percent." So while in the short term cannabis stocks can be risky or unpredictable, in the long term, they nonetheless present an exciting opportunity, he added. "New investors need to do their homework and size their investments accordingly. Stick with quality companies that are the largest in the industry."
To learn more about the whims of the cannabis stock market, we spoke to investors about their greatest gains and losses (at the time of interview), and any advice they have to investors on sticking it out.
Scott Giannotti, founder of the Cannabis & Hemp Association and CEO of Agricultural Evolution International, Inc.
The best up: 100% on MedMen
The worst down: 40% on Auxly Cannabis
Especially come election time, there's always uncertainty with stock prices in general, but particularly with cannabis stocks due to the patchwork of states that have some form of legalized cannabis, not to mention the conflict between state law and federal prohibition, Giannotti pointed out. "So as a result of that and also with Canada [having legalized cannabis] and a rocky rollout of the regulations in California, this sector has been particularly hit hard for investors who are uncertain about what's going on in the short run," he said.
"Know that most of these cannabis companies went public because they need capital to grow in scale. There's a four year window that is the most important [period] in the cannabis industry [happening] between now and 2022: This is where we go from nascent stage to critical mass," he continued. "As a result of the pressure to grow and scale, these companies have gone public and most of them have heavily diluted the stock. Dilution hurts shareholder value, drops earnings per share, which ultimately drives away institutional investors, and damages the value of the security overall."
Jeffrey C. Friedman MD, president and chairman of Zodaka
The best up: 300% on Origin House
The worst down: 50% on mCig Inc.
Advice: "What I can say is that companies that are well capitalized and well run are going to do the best. If you look up and down the industry there are companies that are creating products, companies that are growing products, companies that build grow operations, distribution companies et cetera," Friedman said. "There is no way to decipher which company will do well or not other than doing research on the company itself, the area of the market that it is in, the capitalization, the history of the company and its officers."
Richard Acosta, CEO of Inception REIT
The best up: 80% on Innovative Industrial
The worst down: 31% on Cronos
"Valuations got too rich, too high, too fast," Acosta said of the stock dow we saw in October of this year. October 17, the day cannabis went legal in Canada, caused a lot of euphoria and excitement around cannabis investments, but those highs proved to unsustainable. "I think anybody looking at the sector should be prepared for ongoing volatility," Acosta told Civilized. "Given how much news, both good and bad, is happening around the [cannabis] sector, and things politicians say will shift pricing."
The most volatile high highs and low lows will likely happen with the smallest companies that are public, he added, while bigger companies are more solid. "The good companies will maintain an investor base that isn't a trading type of investor, but more of long-term holders," Acosta said. "That will support stock prices. So I think it's just a couple more quarters before you see stability and bigger names that have real earnings and cash flow."