Cannabis Investing: Boom or Bust
Investing in cannabis is tricky business as you are just as likely to lose your shirt as you are to make a fortune in this neophyte industry. Michael Coffey argues that if you really want to come out a winner, just grow your own.
Is Cannabis a Commodity?
Let’s start with a simple definition of a commodity: “In economics, a commodity is an economic good that has full or substantial fungibility: that is, the market treats instances of the good as equivalent or nearly so with no regard to who produced them.”
Okay, maybe that isn’t as easy to digest as I thought. So, I’ll define it myself as a standardized product that is bought and sold, and nobody cares where it came from or who made it. The product is treated as a generic like gold or oil. Nobody cares if an ounce of gold came out of a mine in South Africa or Egypt. Similarly, crude oil from Saudi Arabia is essentially the same as crude oil from a well in Texas. The quality and value are equivalent.
Cannabis doesn’t really fit the profile for a commodity in the economic sense and it’s no surprise there is no formal cannabis commodities market. However, there is a place for cannabis in the markets. At time of writing there are at least 25 public cannabis companies listed on the NYSE & Nasdaq that I could find. You won’t see any of them in the S&P 500 index but there are plenty of unicorns or pot companies with multi-billion USD market caps. There are also many penny stocks like Sundial Growers and Organigram Holdings.
(Read also: America’s Hemp Hotspots)
You can’t invest in cannabis as a commodity, but you most definitely can invest in cannabis equities, though I would urge you to approach with caution as this young industry is very volatile.
Major League Marijuana
Okay, so now you know the players, but you probably haven’t bought anything from them, and if you did, it probably wasn’t much in the last 12 months. Most of the talking heads will tell you the time for making millions through speculative trading on pot stocks has come and gone. And when you look into the performance of any of the big cannabis names on the stock market you don’t need to be a veteran trader to spot that these are the ultimate lottery stocks.
Take Tilray (TLRY ticker symbol on the Nasdaq), for example. Back in spring the stock saw a huge surge in price to $60+ prior to the reverse merger with Aphria. Post-merger, now the biggest cannabis conglomerate on the planet, and its stock sunk to the low teens by May. I’m not picking on Tilray — the volatility is widespread throughout the industry. Even U.S. multi-state operators like Green Thumb that trade over the counter have whipsawed 25 percent give or take in a single day trading on several occasions this year.
The Case for a Big Bud Boom
The big pot bulls are basically putting all their eggs in one basket and hoping that President Joe Biden will legalize cannabis federally and open up the U.S. market to the established big Canadian players like Canopy Growth and Aurora. With deals already struck to acquire Acreage Holdings the bulls hope this gives them first mover advantage to take over the U.S. market. Tilray, with its enormous global footprint, is perhaps poised to capitalize most in this scenario. Others believe the U.S. multi-state operators will reap the rewards.
(Read also: Political Pot: Weed Strains Suited for World Leaders)
Furthermore, the Bud Bulls believe there is strong pent-up demand and hope a post-coronavirus boom in retail cannabis sales is just over the horizon. Reopening, coupled with federal legalization, could trigger an enormous surge in pot stocks valuations. These two catalysts are critical to the bulls’ case. So, this might be a major windfall for those that bought low during corrections and will sell high sometime in the future.
The Case for a Cannabis Crash
I used the word “hope” a couple of times already. Hope is not a strategy. Nobody can say based on technical analysis there is a strong reason to buy pot stocks, nor can anyone claim one company has a genuine competitive advantage over another in the yet-to-be opened up U.S. market, and there isn’t even a brand name that can create customer loyalty yet. Few of the new retail investors have the patience to endure holding long positions for years in these stocks. Everyone is hoping for a quick win from another meteoric rise of the stock price. If you want to invest in hope, and that’s not necessarily a bad thing, then look at other assets and listen to Michael Saylor’s “Buying Bitcoin is Buying Hope.”
When the dispensaries closed their doors as lockdowns took effect, the black market picked up the slack or people went back to growing their own. Nobody said, “Well dammit, if I can’t get my brand XXX Skunk I won’t toke anything.” And even if you did, for argument’s sake, let’s assume diehard loyal customers toked nothing for the pandemic and patiently waited for the reopening of their favorite cannabis club or dispensary. These customers will purchase what they usually purchased before the pandemic; they won’t buy up the previous 12 months stash. If they typically buy a half ounce or 14g of bud per week, sure, that will resume maybe even a few treats like shatter on top, but nobody will come in on reopen day and buy 500g-plus to make up for the lost trade of the previous year. If that pent up demand fails to materialize, then winter is coming to the cannabis industry.
The Humble Home Grower
Sooner or later reality catches up with the market and blue-sky dreamers crash back to Earth with a hard landing. The facts are most cannabis companies big or small are laying off staff and shutting down production facilities. By the time the world reopens we might have a genuine shortage of supply for the increased demand. But I don’t see any obvious Big Cannabis winners poised to dominate the world in the near future. They are all just as likely to go under before they make a real impact on the global ganja trade.
Cannabis stocks are like Bitcoin, nobody knows if they will be worth a fortune in a few months or worth nothing. It’s difficult to justify present valuations, because they don’t move up and down in price based on the usual fundamentals. News, rumors, and pure speculation by less than qualified day traders fuel the pot stocks movements. If you want to gamble and take chances with your money, you’ll get better odds on the ponies, you might even get lucky and win. The best investment you can make in cannabis and yourself is learning to grow your own. When you are self sufficient you don’t need corporate cannabis.