This article was originally published on ETFTrends.com.
From hemp and cannabis to select psychedelic compounds, the world is beginning to question conventional wisdom around several controversial substances. These three, in particular, represent the possibility of significant medical, economic and perhaps even social benefits.
As exciting as things appear, nothing happens in this world until investors get on board first. With many variables and so much uncertainty in this fledgling industry, there are still several barriers to contend with as we make investing in medical or recreational cannabis accessible and profitable.
1. Impatient Investors and Day Traders Selling Early
One of the most significant challenges in cannabis investing is the investors themselves. The availability of stock trading apps has turned many people into day traders.
Cannabis company Canopy Growth Corp., traded publicly on the NYSE as CGC , had every reason to be a sure thing. Constellation Brands, Inc., which also owns Corona Beer, spent more than $4 billion acquiring a controlling stake in CGC. Investors were, at the time, almost giddy. But in July 2019, CGC’s CEO stepped down, and Constellation later announced a quarterly loss of more than $50 million.
With CGC’s 2019 losses closing in on 13%, this has meant a bumpy ride for investors who didn’t know what they were getting into. CGC maintains it could take another half-decade to reach profitability. More investors, especially casual ones, need to understand this is a long game.
2. Turbulent American Politics
The American cannabis market is a muddled and deeply confusing place. Because the federal government recognizes cannabis as a Schedule I drug, companies and investors have to walk an often impossible line between federal, state and local laws. U.S. lawmakers must resolve this complex and unsustainable situation before the market takes off in this country.
Right now, U.S. cannabis companies that wish to grow their footprint and business models sometimes find themselves at the mercy of Canadian investors. And cannabis companies looking at delivery-based models must squint over maps of county and city lines to find out, sometimes even while they’re already en route, which homes and locations they can and cannot deliver to.
California took steps to smoothen out some of this by making cannabis delivery legal statewide. Other legalized states will need to follow suit, so local cannabis markets don’t stop at city limits.
3. Overenthusiastic Market Valuations
The cannabis market is still new enough that excitement around investing has reached a fever pitch. However, the concern is that this “gold rush” has resulted in market valuations that some believe far outpace reality. The arguments for this usually call out Canada as a quickly growing industry that may be on the cusp of having its bubble burst.
As an example, one company, Aphria, has developed something of a reputation for allegedly doctoring its financials, including passing off derelict buildings as “new assets,” to make it look like the company is on firmer footing than it is.
According to the Motley Fool, the last 36 months have seen cannabis stocks “going absolutely gangbusters.” But they also report that, since May, cannabis growers and other companies in Canada have shed close to 30% of their value.
Based on this, says Motley Fool, the cannabis bubble has “definitely burst” in Canada. Investors in the U.S. must take heed and temper their optimism with skepticism.
4. A Lack of Due Diligence
Investors achieve success when they do their homework. But one of the problems in the nascent cannabis industry is that even smaller players have major regulatory burdens to contend with. Businesses have to spend time courting investors, but they must also perform their due diligence when it comes to compliance.
If investors aren’t looking closely at the compliance programs at the companies they’re thinking about investing in, they could risk financial ruin. Anyone interested in this type of investment should do their research. Find out whether the company in question has full-time regulatory advisers, compliance experts, and a firm regulatory compliance framework.
5. Companies Failing to Differentiate Themselves
Not knowing which types of companies to invest in is another problem investors are likely to struggle with. The companies with unique products and a distinct approach are worthiest of investment — but the learning curve here can be intimidating.
Beyond the “high”-inducing THC products, there are CBD products for pain, edibles, tinctures, ointments, pills, drops, creams, sweets, and hemp products as well. There's an incredible array of variety and not every product type carries the same market weight.
Moreover, with such a broad and growing consumer selection to choose from, it will take more and more out-of-the-box thinking for cannabis companies to differentiate themselves from the rest. Investors should be knowledgeable enough about the breadth of products that they can spot the diamonds in the rough.
6. Stubborn Stigmas
Finally, it’s worth considering that there are still stubborn stigmas around cannabis and its use. A growing body of evidence says marijuana may be effective at treating a variety of conditions, from anxiety and epilepsy to cancer symptoms, with fewer side effects than traditional medical products.
Even so, investors need to be comfortable having cannabis companies on their balance sheets and stock portfolios.
Delaware has a long road ahead when it comes to legal recreational cannabis. But there are several bills before the state legislature that could do two things at once: fast-track legalization and potentially eat into some of the stigmas around cannabis users.
Delaware’s Senate Bill 24 would make medical cannabis legal in cases involving “any other medical condition or its treatment identified in a physician’s written certification for which the medical use of medical marijuana is likely to provide a therapeutic or palliative benefit.”
This legislation is crucial because it would sweep away, at least in Delaware, the state-by-state patchwork of “qualified conditions” for cannabis use and make this, instead, an issue for everyday people and their doctors.
Making this change everywhere would send the message that cannabis isn’t some fringe product for “others” — it is, for many, a potentially life-changing innovation that deserves attention and investment.
None of these challenges is insurmountable. But together, they add up to an awkward moment in the maturation of cannabis as a national and global industry.
States like California can lead by example and move the legal framework in the right direction. But investors have work of their own to do before they can, or should, put their money on the line with any confidence.
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