- The cannabis industry is complex, in part because it’s federally illegal in the US.
- This makes it difficult for retail investors interested in the space to know which stocks are worth buying.
- David Bonnier, founding partner at cannabis investment firm Enexis, and Mitch Baruchowitz, managing partner at Merida Capital Partners, offered their insight into what investors should consider when looking at the industry.
- Both Bonnier and Baruchowitz say that though tools like exchange-traded funds (ETFs), which offer diversified portfolios of stocks, are a good option “if you don’t want to do much work,” doing research into the companies and markets themselves are the keys to successfully investing in the nuanced space.
- “You want to be actively investing because this is an industry that’s still young,” said Bonnier.
Figuring out how to invest in cannabis can be complicated, though there are a few ways retail investors can get in on the green rush.
While Canadian cannabis companies are able to list on major stock exchanges like the Nasdaq, companies that buy or sell cannabis in the US are forced to list on secondary exchanges, like the Canadian Securities Exchange, or traded over-the-counter in the US.
That makes these stocks, like Curaleaf or Green Thumb Industries, difficult to access for investors looking to buy shares through their Robinhood account or otherwise.
Because of that, professional investors like David Bonnier, a founding partner at the Stockholm, Sweden-based cannabis investment fund Enexis, recommend buying cannabis exchange-traded funds, or ETFs, to get your foot in the door.
ETFs are essentially a basket of stocks — say, Canadian cannabis companies or cannabis tech companies — that provide investors a way to invest in a portfolio of companies rather than having to select the best ones on their own, something that takes professional focus.
ETFs are a good way to get involved in cannabis "if you don't want to do much work," Bonnier told Business Insider's Jeremy Berke at the Prohibition Partners Live conference last month. But cannabis investors serious about getting the most return on their investments should take the time to research the companies, the markets, and the complexities surrounding cannabis regulations, said Bonnier.
"You want to be actively investing because this is an industry that's still young," Bonnier said. He said skilled investors should be able to profit by picking individual stocks, rather than buying a group of them in an ETF.
Cannabis ETFs that are split evenly between Canadian cannabis companies and US cannabis companies, known as multi-state operators (MSOs), aren't always ideal, says Bonnier. He believes that US cannabis companies provide a much larger opportunity for investors than Canadian companies like Tilray or Canopy Growth.
AdvisorShares launched a US cannabis ETF, MSOS, on September 1. The ETF has gained 11.4% since its launch.
Mitch Baruchowitz, a managing partner at Merida Capital Partners, said that in his view, ETFs aren't always the best bet for cannabis investors.
"I don't love the ETFs as a thesis in cannabis," he said during the Prohibition Partners Live panel.
In the aftermath of the crowded cannabis market of 2018 and early 2019, bigger cannabis companies are beginning to differentiate themselves from the pack. This trend is only going to continue, according to Baruchowitz.
"There's going to be a large differentiation over the next couple of years," he told Business Insider. "And I think ETFs are probably poor measures of capturing the alpha in that differentiation."
If someone is truly passionate about cannabis investment and wants exposure, Baruchowitz recommends deep research into the state markets a company operates in — and the predictions for how large those markets could become.
"If you buy something that's fairly valued, but the market size is growing so quickly, then you want to be tethered to that market," he said. "So I would focus on market size and how efficient a company operates their SG&A ratios and you're going to do good."
It's an imperfect measure, Baruchowitz said, but a good place to start research on a given company is by seeing if they have a capital-efficient operation and that they're located in the "right markets."
Bonnier predicts that there'll be an opportunity for skilled investors to pick winning stocks for the next five to ten years, as the nuances of the industry play out and legalization spreads around the US and the globe.
"So definitely if you want to do your work, I would advise doing that because there's tons of opportunity for sure," he said.