Making cannabis markets accessible to investors
By Mehar Ally
• It is recommended that investors do their research before investing in the volatile cannabis market
• Cannabis Growth Opportunity Corp. takes the guesswork out of investing and helps investors navigate the cannabis space to minimize risk
• With an experienced team, CGOC actively manages a portfolio of public and private investments
If your cannabis investments fell by 50 per cent in a month, how would you react? If a month later, you noticed a 60 per cent growth in your investment, would that change your mind about the space?
While the cannabis industry has grown significantly in the last few years, especially with the onset of legalization in Canada, the industry remains volatile. When it comes to fluctuating valuations, investors should do a thorough evaluation of cannabis companies to get a better sense of their performance, as well as their own risk tolerance.
In the past few months, the dramatic fluctuation of cannabis stock prices were mainly due to a few catalysts that changed how investors viewed the industry. For instance, Corona beer-maker, Constellation Brands, invested $5 billion last August in Canada’s largest cannabis company, Canopy Growth. This monumental endorsement gave investors a glimpse of what the industry could offer.
Legalization of recreational cannabis in Canada in October 2018 changed the game further with enthusiasts overcrowding the one legal dispensary that was open in Kamloops. Then, in December, Marlboro cigarette maker, Altria Group, announced an investment of $2.4 billion in Canadian cannabis producer Cronos Group Inc.
“Not only are we investing in public and private companies globally, we have access to companies in the U.S. where we see very attractive valuations compared to their Canadian counterparts.” — Jamie Blundell, President and COO, Cannabis Growth Opportunity Corp.
The major challenge
In theory, investing in the cannabis market is similar to many other sectors with one exception: volatility. Neal Gilmer, cannabis equity analyst at Haywood Securities, notes that cannabis “has a higher risk profile than many other investment sectors, and this comes along with higher potential returns; so, they need to figure out where they are comfortable in the risk-reward continuum.” After all, market volatility is not for the faint of heart.
Moreover, the saturated cannabis market has made it more difficult for investors to compare each company before they tie up their funds. “Broadly speaking, the average retail investor doesn’t do enough of their own due diligence or have the right background knowledge to evaluate one versus the other,” says Gilmer. “From that perspective, they would be better served letting somebody else do that. That’s where a company like CGOC can come in and play that role for investors.”
Why invest in CGOC?
Cannabis Growth Opportunity Corporation (CSE: CGOC) is an investment corporation that offers unique global exposure to the emerging global cannabis sector. The company’s main objective is to provide shareholders long-term total return through its actively managed portfolio of securities, both public and private, operating in, or that derive a portion of their revenue or earnings from products or services related to the cannabis industry.
Having access to a financial vehicle such as CGOC can be beneficial for investors who are unsure of where to place their funds. “If you look at CGOC’s returns from inception (over the last year), it was at 29 per cent. It has done exactly as we expected. Unfortunately, that hasn’t translated into the share prices. It is trading at a discount and offers a significant opportunity for shareholders who want to get access to the cannabis space through a diversified portfolio.”
Fortunately, Blundell expects the discounts to close this year as the company continues to grow and demonstrate their value proposition.
Access to private U.S. players
CGOC provides access to private U.S. companies where it sees a significant advantage.
“That is one of the big wins for CGOC, the ability to invest in U.S. cannabis companies and help fund their growth,” says Blundell. “Not only are we investing in public and private companies globally, we have access to companies in the U.S. where we see very attractive valuations compared to their Canadian counterparts.”
At the same time, what is happening in the U.S. is another factor to keep in mind. Cannabis is still federally illegal in the country, but in the next 12-18 months the States Act will unfold. This Act is expected to de-schedule cannabis for medical purposes, but each state will be able to decide whether or not they want to legalize recreational cannabis.
Long term potential
The Canadian cannabis industry is still in its infant stages — with the regulation of edibles, creams, and the addition of more legal dispensaries yet to be determined. While Health Canada is working on drafting these regulations, it will be some time before they are finalized.
“My view on the sector overall remains quite positive,” says Gilmer. “I still think there are lots of developments to come, lots of investments to come and lots of positive shareholder returns. I will caution that it’s a very volatile sector. We are going to see very drastic swings in valuations and therefore people should invest according to their ability to withstand those valuation swings.”
As the industry matures, the global legal cannabis market is estimated to reach USD $146.4 billion by the end of 2025, according to a report by Grandview Research. The report also suggests the cannabis market will see a prosperous CAGR of 34.6% throughout this period, so it is necessary for investors to evaluate their options and understand the market should they want to participate in it.