The cannabis sector has been a real rollercoaster market in recent years. This is especially true in Canada. The country legalized recreational cannabis in October 2018. At the time, New Frontier Data projected that the country’s cannabis market will reach $9.2B (CAN) by 2025. On the ground, it’s easy to see this happening in real-time, with new dispensaries and brands constantly launching. The reality of the sector, though? A statutory review of the Cannabis Act will start soon, and the Cannabis Council of Canada (C3) has its sights set on policy changes. So is investing in cannabis a good idea?
Ultimately it really does depend on the individual investor! After all, everyone has different financial goals and risk appetites. Nevertheless, it’s important to do in-depth research into cannabis investing before diving in, so you can make an informed decision. Let’s start with some of the myths and realities.
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Table of contents
Reality: There is more to the business than growing and selling cannabis products
Growing and selling are usually what investors think of when they’re considering the cannabis industry. However, there are a number of ancillary or “non-plant touching” businesses.
Some examples of ancillary businesses are those in agriculture technology and biotechnology. Agriculture technology is based on developing and improving equipment used to grow cannabis, such as better lighting systems. Biotechnology focuses on the plant’s medicinal qualities to combat illnesses and diseases.
There are also consulting services helping businesses deal with the evolving rules and regulations between different jurisdictions and issues with zoning, licensing, and operational procedures. Even companies providing services and products like packaging, insurance, and equipment like breathalyzers and testing tools. When you think about it, there are actually quite a few side industries helping keep the sector going!
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Reality: Investing in cannabis stocks is risky
Think back to 2017-2018, and the deafening hype of the cannabis industry in Canada. It was everywhere! At the time, many were jumping onto the cannabis investing bandwagon, thanks to this hype. What is investing in cannabis like now, three years in?
The industry is still in its infancy. Many companies started out with a bang and have since fizzled. There’s been plenty of hot periods and just as many cold periods with cannabis investing. It’s difficult to predict future success — especially when complex cannabis regulations continue to change and force companies to adapt. As a result, it’s important to be mindful of risk.
With that said, high stock prices are usually based on rising interest and future expectations about the business instead of current performance. In certain cases, companies that simply announce their intent to get into the industry have seen their stock price go up, without having established any businesses.
Given the speculative nature of the business, cannabis investing is not for everyone. For example, an investor with a low-risk tolerance looking for stable income may want to avoid cannabis stocks since the chances of losing money are high.
Over the last couple of years, these stocks have experienced large price fluctuations over a short period of time. Prices have almost doubled in a span of months while also losing more than twice their value over the same time frame. If you decide to invest in cannabis stocks, be prepared to see high returns offset by larger losses.
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Cannabis and ESG investing
Finally, if you’re wondering whether cannabis can adhere to ESG (environmental, social, and governance) principles, you’re not alone! The industry might be on shaky ground with respect to the ‘E’ and ‘G.’ Its medicinal value, however, gives the ‘S’ some merit. But as Horizons ETFs CEO Steve Hawkins explains: “the pros outweigh the cons and should be sufficient to see cannabis included, especially when some asset managers are willing to place oil and gas stocks in their ESG funds.”
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Myth: Cannabis investors are not allowed into the US
Following Canada’s legalization of cannabis in 2018, the U.S. Customs and Border Protection (CBP) released a statement that Canadians working, investing, or participating in the industry could be found inadmissible and face a lifetime US travel ban — given the substance is illegal under US federal law.
The CBP, however, later clarified their stance:
“A Canadian citizen working in or facilitating the proliferation of the legal cannabis industry in Canada, coming to the US for reasons unrelated to the cannabis industry will generally be admissible to the US. However, if a traveller is found to be coming to the US for reason related to the cannabis industry, they may be deemed inadmissible.“
In other words, investing in cannabis shouldn’t hinder future trips to the US depending on the purpose of travel. For example, if you split your time between Canada and the US (eg. Snowbirds), and your investment portfolio holds a few cannabis stocks, you probably won’t have any issues getting into the US if you’re going on vacation. But if you work in the industry and are planning to attend a cannabis conference? You may be denied entry and face potential travel bans. The CBP states that as long as the purpose for travelling is deemed “related to the cannabis industry,” a traveller faces a potential ban even if travelling to a state where cannabis is legal.
Federal legalization of cannabis in the United States
As of early December 2021, cannabis is recreationally legal in 18 states and medically legal in 36. It’s still illegal at the federal level. This might change soon, however. First off, legalization has rather widespread support. Second, legislation was introduced to the House of Representatives in mid-November, that would decriminalize cannabis federally, remove any hazards facing many cannabis-related businesses, and regulate its use like alcohol.
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Takeaways
Interested in investing in cannabis? Good news: publicly traded cannabis companies must provide disclosure documents such as a prospectus. These contain valuable information on the business, operations, and associated risks. Company materials like financial statements and management commentaries on company performance and trends are also valuable to prospective investors.
Finally, speak to a financial advisor or wealth manager. Although potentially high returns are attractive, a professional can assess their suitability and whether it’ll help you achieve your financial goals. That, of course, should always be the priority.
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