Beginner’s Guide to Investing in Cannabis
This article is called the sixth in a series “So you want to start a canna business?” Created in collaboration with Good Tree Capital. This article highlights various areas in which you can start investing in cannabis and should not be viewed as investment advice.
The legal cannabis industry has gained a foothold in our economy and in our daily lives. Two out of three Americans are now in favor of legalization. And even those who don’t use have likely hit a cannabis headline in their mainstream media.
While most industries were turned upside down during the COVID-19 pandemic, cannabis proved indispensable, adaptable, and deeply ingrained in our culture and economy. Reported cannabis sales grew 46% in 2020 alone, and investment opportunities continue to emerge with statewide legalization.
You should do your homework before venturing into the world of cannabis stocks. This includes understanding the different types of cannabis deals and the fact that the cannabis industry can be a playground for predatory practices.
Now that you have your wits in mind, here are 5 simple tips for investing in cannabis.
Editor’s Note: The information in this article is for educational purposes only and is based on the expertise of Good Tree Capital.
1. Buy organic
It is important to remember that stock prices can fluctuate quickly due to new circumstances and the decisions of influential market participants.
One approach to finding great cannabis companies is to identify the small to medium-sized local operators who are more interested in organic growth. These cannabis operators grow because customers ask for their products, not because they are on a shopping spree to gobble up licenses.
You have a positive unit economy, first-class system utilization and acquire new licenses both strategically and at a deliberate pace. What is important is that it is extremely difficult for them to gain access to capital, which leads to high and unmet demand.
2. Increase your risk with ETFs
ETFs are a great way to target multiple companies towards a common interest, as long as you carefully consider fees. They vary and can significantly undermine long-term profits.
Exchange Traded Funds (ETFs) can enable investors to isolate themselves from the inherent risks of a single company or large MSO (Multi-State Operators). Cannabis ETFs are typically a basket of many companies along the cannabis supply chain, but can sometimes also include companies in the non-cannabis industry.
ETFs have many different mandates. Some focus on a specific business segment, like MSOS. Others like CNBS and YOLO have a broader perspective. That means they can often benefit from booms in the cannabis market while still being resilient to dramatic slumps in the industry.
The quality of an ETF is only as good as the theory and practice with which it brings companies to market. They may outperform the market today, but whether they have a smart and compelling basis for asset addition / removal will determine the long-term performance of an ETF.
How Much Does It Cost to Start a Cannabis Business?
3. Break up the research
From start-up to sale, all good investors should roll up their sleeves and study the basics of the companies they invest in. The more you know about a company or an industry, the better you can identify opportunities and risks in the market.
When it comes to cannabis, take the time to get to know the smaller operators who run local businesses. It will certainly take more effort, but cannabis companies of all sizes, including mom and pop stores, create and maintain a lot of value.
Bad cannabis stocks will not be able to sell their products at a higher price than it will cost them to bring those products to market. This company’s earnings before interest, taxes, depreciation, and amortization (EBITDA) have been negative year after year, suggesting that management hasn’t figured out how to keep the lights going using just the funds generated by the company.
Of course, some investors are willing to accept massive short-term losses if there is a reasonable expectation of long-term gains. There are CEOs who justify losses as a necessary cost of rapid expansion and acquiring new licenses. However, a deeper look into the asset utilization of these companies often tells a different story.
Never stop doing your net worth homework.
Follow the news to learn how acquisitions and innovations are affecting cost and operational efficiencies across the company. Make sure the ROI and ROE are not generally negative over time to avoid companies that are really just eating up investor capital without adding anything valuable to the market.
To measure whether a potential stock has a fair price, divide the company’s value by sales and write down the multiple obtained. As a rule of thumb, companies whose multiples are between 1 and 3 are likely to be a good number.
In general, at a low ratio, the company can be undervalued. If it’s high, it means investors will have to pay more for every $ 1 of sales made.
Marijuana sales data shows Americans bought 71% more weed to survive in 2020
4. Only invest what you can afford
Don’t let FOMO or greed put you under pressure to burn more greens than you can afford to lose. Investing is not about getting guaranteed returns, but rather about balancing risk and reward over time.
Some investors prefer high-risk, high-return investments, while others are content with slow and steady returns that they can count on for a long time. It can be a good idea to keep your stocks a little diversified to protect you from the ups and downs of this young and volatile market.
Just don’t forget to weigh any cannabis risk in your portfolio against other investments that may be more stable, such as B. Local growers or additional cannabis companies.
If you think a emerging stock will hit like an edible in 2023, put yourself in a position to confidently take the risk and await your sweet reward.
5. Invest with good tree capital
Good Tree Capital completely waives equity. Why?
Investing in debt for the cannabis industry is a far less-explored investment option. Banks (by far the largest source of debt) are currently banned from use in the cannabis industry, which means that small business loans are barely available to cannabis entrepreneurs.
Good Tree Capital solves this problem while offering investors exceptional returns.
In 2019, Good Tree Capital hosted a hack-a-thon for small business owners and saw firsthand the impact of this form of hands-on engagement and local investment. One participant, Torica Clegg, saw no way to apply for and purchase a license without investing in the technical resources provided by Good Tree Capital.
When necessity is the mother of innovation, entrepreneurs like Torica will be skeptical of how they are using hard-to-get invested funds while getting better returns for the investor.