Cannabis Investing: Navigating the Volatility of Emerging Markets
Cannabis companies are one of the hottest investment opportunities today. MJBiz Daily, a leading cannabis business information group, found that the Combined U.S. medical and recreational cannabis sales reached $33 billion at the end of 2022. By the end of this year, it is projected to reach $38 billion.
Investors are flocking in droves to buy marijuana stocks and
invest in private equity funds focused exclusively on the rapidly growing cannabis industry.
A Strategy For Cannabis Investing
Multiverse Capital is a cannabis funding and investing firm that looks for cannabis investing opportunities based on factors, including:
- strength of the management team
- prior track record running other businesses
- understanding regulations & compliance and
- competitive advantage in the marketplace
Looking for these factors when investing in cannabis helps to mitigate the risk of investing in somewhat of a volatile industry.
Follow The Money
Warren Buffett, one of the most successful investors in history, is well-positioned to take advantage of the growth of ancillary companies in the cannabis space.
For example, Cubic Designs, a company which provides
prefabricated structural steel products which can be used by commercial cultivators to maximize their space, was acquired by MiTek, a Berkshire Hathaway company.
In addition, cannabis companies such as
22nd Century Group, CanniMed Therapeutics, and
Tilray use Business Wire (owned by Berkshire Hathaway) for press releases and updates on their cannabis industry investing. Other high profile investors such as Snoop Dogg and Peter Thiel have invested in
various cannabis businesses in both the United States and Canada.
“The Sessions Effect”
Recently, U.S. Attorney Jeff Sessions announced that he is rescinding the Cole memo. This bill was designed to protect cannabis companies operating in compliance with state regulations from federal prosecution.
As one might expect, this news triggered a sell-off of U.S. marijuana stocks. Also, surprisingly, some
Canadian cannabis stocks lost value last week.
However, according to a report in
MJBizDaily, financial analysts said Sessions’ decision could wind up being a “net positive” for Canadian cannabis companies as it may result in more investment money flowing into local cannabis businesses.
In December 2017, the
Canadian Marijuana Index was up over 100%. Over the last six months of 2017, it was up over 300%.
While that is great news for anyone who invested in these companies early on, the valuation may be a bit too high at the moment. That being said, the most recent update from
Green Market Report indicated that marijuana stocks in both the United States and Canada rallied to end 2017 on a high note.
The report also mentioned the three biggest cannabis investor gainers of 2017:
- Namaste Technologies, gaining 1,107% in value for the year
- Cronos Group (PRMCF) gaining 558%
- Solis Tek Inc. (SLTK) which gained 337%
Investing in Cannabis Real Estate
Real estate used for cannabis cultivation, cannabis processing and even for dispensaries is selling at a premium in every state where cannabis has been legalized.
According to the
New York Times, “In the more than two dozen states that have moved to legalize pot – factories, warehouses, and self-storage facilities are being repurposed for the cultivation and processing of potent marijuana plants and products.”
In the past five years, many cannabis real estate entrepreneurs have seen their
warehouse rents skyrocket after they had already spent tens of thousands of dollars converting the space into a cannabis cultivation facility. With this increased annual revenue, warehouse owners and real estate investors have reaped the rewards.
When it comes to cannabis real estate, there are a few advantages to consider:
- In the event of a cannabis business getting shut down or being mismanaged, the real estate can still be repurposed for another type of business.
- By owning real estate and using an arms-length agreement to lease space to cannabis companies, you’re likely to avoid the liability related roller coaster ride of federal changes.
- Again, it’s helpful to remember a diversified cannabis real estate portfolio should have multiple properties in multiple states across multiple sectors of the cannabis business.
Reducing Your Risk With Cannabis Investing
One way to reduce your risk when investing in cannabis companies is to spread out your investment among multiple companies, similar to any well-diversified portfolio. This way, if one of the cannabis companies you invest in doesn’t do as well as you had hoped, there’s a chance that one or more of the other companies you have a stake in will be successful. In the end, it helps to generate a healthy return on your portfolio.
Better yet, consider investing your money with a professionally-run cannabis private equity fund.
In February 2018, Nic Easley,
CEO of 3C Consulting and Multiverse Capital, gave a presentation at the
International Cannabis Business Conference in San Francisco.
Entitled “High Stakes Domestic/International Cannabis Investments and Opportunities,” Nic presented hard-hitting facts and advice for those considering investing in domestic and international cannabis markets.
Do Your Due Diligence Before Investing
While marijuana stocks are all the rage, not every company will yield double or triple-digit returns.
In fact, many companies in the cannabis space today will fail. One thing to beware of is investing in cannabis companies surrounded by a lot of hype. In a move sometimes known as a “pump and dump,” some cannabis traders (short-term, not long-term investors) buy a stock and then start promoting it on investment forums and elsewhere to drive up the price artificially. Then they dump the stock, taking their gains and leaving everyone who followed them “holding the bag.”
As a business owner, investing with a
private equity fund that specializes in cannabis companies is a way to have a team of investors do your due diligence before investing.
As an individual investor, say you only have $100K to invest. You might be able to spread that risk among 2 or 3 cannabis companies. By investing with a larger cannabis equity fund, you will spread that risk among many companies. Even if one or two of those companies fail, the overall portfolio performs well.
Why not invest your money with
a group of seasoned professionals, who are experts at analyzing cannabis companies and who meet face to face with cannabis company CEOs to learn more about their strategy, ensure they are operating in compliance with regulations and gauge their ability to grow a company in this marketplace?
Cannabis Industry Mergers and Acquisitions
While there is never a “sure thing” in investing, we can be fairly certain that there will be consolidation taking place in the cannabis industry.
How do we know this? Check out some of the latest mergers and acquisitions to happen recently:
- Constellation Brands, owner of Corona and Modelo beer, bought a 10% stake for more than $90 million in Canopy Growth Corporation, a publicly traded Canadian based cultivation company.
- Another Canadian cannabis consolidation occurred whenAphria, Inc. announced that it is purchasing Broken Coast Cannabis for $230 million (Canadian dollars, approximately $185 million USD) in cash and stock.
- In January 2018, Toronto based “WebMD of medical cannabis,” Sail Cannabis acquired Canna Care Docs. This Massachusetts based company operates 21 medical marijuana evaluation centers across nine states.
- 1st WEST M&A, a Colorado-based investment banking and M&A advisory firm, recently announced that one of its managing directors, Dr. Carl Craig, will be focusing on “bringing companies to market for acquisition that serves the rapidly expanding cannabis markets.”
It’s highly likely that other large corporations will want to grab a piece of the cannabis pie. Knowing which companies are well positioned for a potential merger or acquisition gives you a distinct advantage as a potential investor.
Not every company is interested in an M&A exit strategy, however.
Recently there was an attempted hostile
takeover of a medical marijuana company in Canada. Aurora Cannabis made an attempt to buy rival CanniMed Therapeutics for $24 per share, but the CanniMed board of directors rejected the offer and issued a press release mentioning a plan “to ensure that all shareholders are fairly treated, well informed and not subject to coercive bids.”
Since then, cannabis investors with
CanniMed secured a deal to distribute medical marijuana in 17 countries.
Key Points For Cannabis Investors To Consider
- Cannabis is still federally illegal and with that, there are additional risks beyond the normal risks of any other type of investment.
- Ancillary companies are a less risky investment opportunity with plenty of potential upside.
- Diversify your portfolio as much as possible to spread your risk over many different companies.
- Do your due diligence or find someone who has the background and experience to identify compliant cannabis companies with outstanding products and services and a solid management team.
- Stay in for the long haul. If you are likely to need your investment money back within six to 12 months, cannabis investing is probably not going to be your best bet.
- Participate in politics and industry events. If everyone involved in the cannabis industry - including all the ancillary companies, all of the medical marijuana patients and everyone who has invested in marijuana stocks - were to support candidates who are proudly pro-legalization, that could turn the tide in the fight for federal legalization of cannabis in the United States.
Trust in a Cannabis Industry Consultant for Investment Due Diligence
It’s only a matter of time until Federal de-regulation of cannabis becomes a reality. At that time, U.S. banks and other, more conservative financial institutions are likely to invest in the legal cannabis industry. Those who invest prior to Federal de-regulation may be rewarded by earning a greater return on their investment.
When you’re ready to start exploring the world of investing in cannabis, remember to partner and team with executives that not only know the industry well but will assist in
investing due diligence.
Our team of
cannabis industry consultants and investors are here to ensure that the investment deals you are vetting are resilient enough for the long haul.
Following nearly 15 years of advising legal cannabis businesses in the industry, our expert firm at 3C knows how to thoroughly vet businesses to determine future profitability and avoid common investment pitfalls.
Contact 3C today to learn how to kickstart your cannabis investing strategy and due diligence!
Reference info:
https://mjbizdaily.com/canadian-marijuana-stocks-pare-losses-benefit-long-term-sessions-decision/
Cannabis Real Estate Investing
https://www.ocregister.com/2017/05/25/serious-investment-money-coming-to-cannabis-industry/
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