If you are looking to cash in on the latest trend, then cannabis might be worth a look. I have been watching the industry with interest, not because I believe in the legalization of cannabis, but because, as an investor, I believe in the potential of the industry. I have never believed that investing in a company meant that I have to become a customer of said company. Therefore, as an investor, I have learned how to intellectually separate being an investor from being a consumer. After all, I can own Bank of America Corporation (NYSE: BAC) stock without having a checking or savings account with the bank.
The one fact about investing that supports this separation is called the secondary market. Unless you are participating in an IPO (initial public offering), the money you invest is exchanged between investors, not between the investor and the company. When an investor places an order to purchase a stock, he or she is offering his or her financial resources in exchange for the right to participate in the future earnings of the company being purchased. This means, money is exchanged between investors and nothing flows back to the company.
Purchasing any stock gives you the right to participate in the future earnings of a company. It also positions you to take advantage of the arbitrage from mergers, acquisitions, and spinoffs. And this industry is ripe for many of these types of activities. The speed at which the market is developing is reminiscent of the Dot-Com craze of the 90s and where the market is going is anybody’s guess. I have my thoughts on that and I hope to express them here without appearing to endorse the industry as a whole.
So, let’s look at a few facts. The cannabis industry is in its infancy. However, there are a few big players who have risen to the top of the industry. However, I do not believe any single player has cemented the title of best in breed. Canopy Growth Corporation (NYSE: CGC) is one of the top players in this budding market (pun intended). The one thing that sets Canopy apart from the rest is the amount of corporate money it currently has behind it. Constellation Brands, Inc. (NYSE: STZ) has made a sizable investment in Canopy, which give the stock support and stability for the investor.
However, if the market does not play out in favor of Constellation’s investment, the corporation could pull back its investment, effectively crushing the stock. Constellation invested $3.8 billion in Canopy. If they decide to jettison the cannabis industry, Canopy’s stock will become a penny stock. Although I believe there is money to be made with Canopy, I would not want to be holding the stock if things go south and Constellation decides the cannabis play is not to its liking. The encouraging news is that Constellation is willing to put its money where it believes the market is headed.
PepsiCo, Inc. (NASDAQ: PEP) has been rumored to be interested in cannabis infused drinks as well as companies such as New Age Beverages (NASDAQ:NBEV) and Craft Brew Alliance, Inc. (Nasdaq: BREW). Beverage companies are not the only one interested in throwing corporate money behind the cannabis industry. The tobacco sector is also interested and companies such as Altria Group, Inc. (NYSE: MO) have most recently expressed interest. If corporate money gets behind this industry, it will be a good place for an investor to be, but those with first mover advantage will make the most money.
Looking at the other top players in the industry, Tilray (NASDAQ: TLRY) shares are up more than 800% from its IPO price of $17 per share on July 18th. In addition to the cannabis stocks such as Canopy and Tilray, which are listed on major U.S. markets, Cronos Group Inc. (NASDAQ: CRON) is seeking to capture U.S. investor’s money. Cronos is a principal investment firm, seeking to invest in companies either licensed, or actively seeking a license, to produce medical marijuana pursuant to Canada's Marihuana for Medical Purposes Regulations.
Cronos is not a producer, but plays in the space of legalized cannabis, as is ETFMG ALTERNATIVE HARVEST (NYSEMKT: MJ), which is a mutual fund of cannabis stocks. I believe it is important for the investor to stay with pure-play cannabis and stay away from those looking to “get in on the action.”
After studying this industry, I believe there are a couple of up and coming companies that offer investors the best opportunity for a return. I believe that along with the new “heavy weights” in the industry (i.e. Canopy and Tilray), Aurora Cannabis (NASDAQOTH: ACBFF) (TSX: ACB) is the hidden gem amongst the cannabis stocks. The entry point is still affordable to most “home gamers” (as Jim Cramer likes to refer to us) and offers exposure to both sides of the cannabis plant – medical and recreational.
Aurora is planning to list on the U.S. Markets in October 2018. Chances are if you read this post after October 31, 2018 the stock will be listed on the NASDAQ. Another over-the-counter stock from Canada is Aphria Inc. (NASDAQOTH: APHQF). This one is also what I consider a hidden gem. It has a lot of attention from Altria. I believe the interest of beverage stocks, as well as tobacco companies, will continue to dominate the social shift to cannabis products – each trying to position themselves in the market.
As the beverage companies look at cannabis infused drinks, there will be others tapping the edibles market. I am watching Rocky Mountain Chocolate Factory (NASDAQ: RMCF), which is located in Colorado, to see if this confectionary company will be moving towards edibles. Right now, there is no indication that it intends to enter the cannabis space, but first mover advantage dictates that watching the company might be prudent.
The final company I want to address, that has had some press around it, is MedMen Enterprises, Inc. (MMNFF) (MMEN.CN), which is a U.S. cannabis retailer. MedMen has a joint venture with Cronos (no pun intended) and just inked a $682 million acquisition of PharmaCann which will make it the "largest U.S. cannabis company in the world's largest cannabis market.” With the news that the Trump administration will look at de-criminalizing cannabis on a federal level after the mid-term election in November 2018, I believe the cannabis industry is poised to make millionaires of those who take the risk and make the right choices as to which company they should invest.
Entry and exit points are as dynamic as the industry itself and caution and due diligence should be exercised. Therefore, be wise and do your research before making the decision to invest. As I stated in the beginning, I am looking at the industry through the eyes of an investor. That is by no means an endorsement of the product itself. It is just an analysis of the world in which we live. There will be money made in this industry. As an investor, you have to ask yourself some difficult questions about your values and your dollars.
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