Estimated read time: 3 minutes
Publication date: 11th Mar 2021 13:46 GMT+1
Investors are always on the hunt for stocks that can help them multiply their capital at an exponential rate. This means they need to identify companies that are part of a fast-growing industry and the pot sector is well poised for rapid growth in the upcoming decade.
There is a strong chance that the U.S. will legalize marijuana for recreational use at the federal level. The widespread adoption of medical and recreational marijuana products all around the world is likely to gain pace which means companies with an already existing infrastructure and production capabilities have the potential to increase your wealth multifold.
However, as is the case with all nascent industries, there are significant risks that you need to be aware of.
Canadian cannabis stocks are under the pump
Several cannabis companies north of the border are facing multiple structural issues. While Canada legalized marijuana for recreational use back in October 2018, pot producers have been grappling with a thriving black market, lower than expected demand, high inventory levels, million-dollar write-offs, slow rollout of retail stores in major provinces and negative profit margins.
There are entry barriers and this industry is highly regulated. Further, there might also be restrictions when it comes to branding and advertising of cannabis products. These issues might impact a company’s ability to sell products and generate sustainable profits.
Further, as the cannabis industry continues to expand and evolve, new companies are bound to enter this space and compete with existing businesses. This in turn may result in price wars that may impact profit margins of pot producers.
Cannabis producers need to sell their products at a lower price compared to the black market. However due to high taxes this is not always possible which means producers are unable to operate at scale and make a profit.
Inflated prices and dilution
There are significant capital expenditures associated with developing and operating a marijuana company. The producers need to invest heavily in specialized equipment and large-scale manufacturing facilities.
Further, investors always bet on the company’s ability to increase its share in an expanding addressable market. These investments might turn out to be highly speculative as the cost of investment is generally based on future expectations and not current performance.
As companies burn cash at a fast pace, they constantly raise equity capital that dilutes shareholder wealth generally resulting in a corresponding decline of share prices.
Types of cannabis companies
The cannabis market currently has a significant number of players. It can be likened to the dot-com bubble that we saw back at the start of this century. Investors should brace for multiple bankruptcies as well as consolidation in this sector.
However, there will be a few winners that will crush the broader market returns. You can look to invest in:
Marijuana ETFs: Horizons Marijuana Life Sciences ETF and ETFMG Alternative Harvest ETF (AMEX: MJ)
Disclaimer: The writer is an experienced financial consultant who writes for Finscreener.org. The observations he makes are his own and are not intended as investment or trading advice.
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