How to invest in cannabis: Six things you should consider before picking a pot stock

Want to know how to invest in cannabis? The best practices are like most investment considerations—with some tweaks.

The emergence of the legal recreational cannabis industry presents a rare opportunity. It has opened the door to hundreds of new Canadian businesses and created a rush of economic activity. Added to that, new and promising cannabis companies are still emerging, providing an opportunity for growth in the sector. For investors figuring out how to invest in cannabis, there’s no shortage of choice. 

While having this many options available can be exciting, it also makes it difficult for investors to select which of these companies to add to their portfolio. Just like with any other investment market, investors need to do their research and decide which cannabis stocks make a compelling case.

How to invest in cannabis the right way

The first place investors should look when assessing an investment opportunity is the company’s corporate presentation. Ideally, this document will include financial projections, the management team’s vision, as well as a comprehensive outline of what the company is doing in the space and how it’s different from everyone else. 

Beyond that, there are a number of strategic questions investors can ask to make sure this is an investment avenue that makes sense for them.

Who’s at the helm?

To start off, potential investors should find out who is on the leadership team. The legal cannabis industry is only new in its most recent form—it has years of history that precede it. There have been medical cannabis producers operating in Canada for more than two decades, as well as successful cannabis retail shops in cities like Vancouver and Toronto that opened well before 2018. This means that there are plenty of experienced cannabis business leaders in the country who know the industry inside and out. These are the types of leaders you want to look for in a management team.

Which licenses does the company hold?

Canada’s regulatory setup is notoriously strict and licenses can be difficult to acquire, making them coveted assets. At the federal level, this includes licenses for cultivation, processing, research, medical sales, and testing—most of which have subclasses. Meanwhile, retail licenses for adult-use cannabis are granted at the provincial or territorial level. 

For producers, the necessary licensing for a large growing space can set the company up for an upward trajectory. Meanwhile, in cities like Vancouver, where only a few retailers have been granted sale licenses, having a fully-licensed retail space is a huge deal.

What acquisitions have they made?

Cannabis companies are growing rapidly, in large part by acquiring growing facilities, retail spaces, distribution networks, or brands. On top of that, the industry has entered its merger and acquisition phase, with many companies buying others and absorbing their assets. The details of a company’s completed or planned acquisitions will help tell the story about how a company has grown and how it could continue to grow.

Are they sustainable?

Sustainability is equally applicable in both a business and an environmental sense. All facets of the cannabis industry can be very resource-intensive. For example, growing cannabis can involve heavy use of electricity and water to run grow lights, hydroponics, and more. Even keeping the lights on in a retail store can run up significant electric costs. Interested investors should explore whether a company has accounted for these and other potentially unforeseen costs in their financial plans. At the end of the day, companies should be able to show potential investors that they are designing their operations with efficiency and sustainability in mind, both for the planet and their bottom line.

What’s their unique approach?

Cannabis in Canada has very quickly become a highly competitive business, so companies are constantly looking for ways to innovate how they go about their operations. A cannabis concentrate producer might use a unique proprietary extraction method that results in a purer, stronger, or more flavourful extract. A retailer might have a unique and compelling approach to branding and customer service. Investors should try to find out what makes a company stand out in a busy cannabis landscape as that could be the key to their revenue.

What’s the company’s long-term vision?

If a cannabis company is seeking investment, it should have a clear and concise expectations for where it plans to be in five to ten years from now. Just as importantly, the company should have an established roadmap for how it intends to get there. For instance, a producer could plan to become an industry leader through acquisitions, or a retailer could aim to open stores across the country, becoming a household brand. As you consider your investment options, assess the companies’ long-term vision for how it aligns with your broader values and your portfolio.  

The latest iteration of Canada’s cannabis industry has opened the doors to a massive investment space—and that means numerous investment opportunities that can be hard to wade through. By doing a little research and asking the right questions, savvy investors can find how to invest in the cannabis companies that are most aligned with their values and have the best chance returning value.

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