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What a difference a few years makes. Marijuana has gone from being a strictly illegal commodity to almost everywhere in the United States of America. As a result, a number of public companies have sprung up to grow and wholesale the crops. But it is still possible, and it inevitably, to seriously speculative stock price movements.
In this segment of the Motley Fool Answers episode, hosts Alison Southwick and Robert Brokamp ask David Kretzmann, who heads up the Motley Fool Group, focuses on the business, to help them identify the best strategies for this market-driven space.
A full transcript follows the video.
This video was recorded on Nov. 6, 2018.
Alison Southwick: Some of the estimates for growth in the industry – and, granted, this is from the Cannabis Industry Annual Report, they may be a little skewed – but they anticipate that by 2025, between recreational and medical use, cannabis will become a $ 24 billion industry. Twice as much as wine. Is that just for the U.S.?
David Kretzmann: That's just the U.S.
Southwick That's bonkers.
Kretzmann: It's a big industry. I think what's interesting about it is that it's not really any direct comparison for an industry that's manifesting in this way. Obviously it's been here, but there's no direct comparison for where cannabis stands today. At this point, you have a lot of different projections and estimates of how big the opportunity could be. People trying to figure out how big the black market is in cannabis. What will the legal cannabis market look like?
So, it's a pretty substantial opportunity. Then you can take into consideration the potential of the world as a whole.
Southwick So we're talking about investing in cannabis. What really are we talking about? What kinds of companies? I do not imagine I'm just going to some money to a hippie standing out in the field in the middle of Oregon.
Robert Brokamp: You could! You could! But it's not a good investment.
Southwick I could! But I just do not know that that's the right way …
Kretzmann: Probably not encouraged. At this point, Canada really is the haven for a lot of these legal cannabis producers. It is the most attractive market to capitalize, because these companies can actually be found on the Toronto Stock Exchange, or the TSX Venture Exchange for smaller companies. It's relatively easy to list your shares. And the fact that this is a legal situation in the US, because you're able to get a loan from the US, because it's still criminalized on a federal level, a lot of banks in the US, even though it is legalized in some states.
So you're looking for more investment, investment, entrepreneurship as a result. You have companies really all along the value chain. Companies are looking to produce cannabis. Companies are looking to distribute cannabis. And oftentimes these companies are actually vertically integrated because, there is no such excess supply of cannabis you can access. So, if you want to sell cannabis, you also need to grow cannabis at this point.
Part of what's exciting here, what we'll finally see how this market unfolds over the next year in Canada. That gives you an idea of the landscape. Right now there is probably over 100 publicly traded cannabis companies in Canada. They're all across the spectrum of their place in the industry.
Southwick So there is a way to invest in something, and hopefully there is a dumb, Foolish approach to investing in the growth potential of the cannabis industry. What is your Foolish approach?
Kretzmann: First, let's start with the things that you want to avoid. You have to recognize that there is a lot of speculation here. There's a lot of frothiness, and partly for good reason. Like this is a new opportunity. I personally am convinced that this is the beginning of a broad, legitimate, legitimate cannabis industry, so I think it is reason to be excited.
But at the same time, we believe in expectations, because we believe that we are not trading on the basis of the present-day fundamentals or a track record, , at most. Now finally, in Canada we have a national recreational market, so there is a large opportunity there, but the shares of these companies are based on future expectations and hype.
There's undoubtedly a lot of frothiness here. I'm sure people have seen Tilray in the headlines. That's a company that went public in July. They're a Canadian producer, but they go public directly on the Nasdaq. Gained to your attention. I think their IPO was initially priced at about $ 20 a share. It went up to $ 300 a share within a couple of months, and we are now $ 170 when this airs in a few weeks. Who knows where it will be? It could be $ 300 or $ 20 for all I know. There's a lot of shorter-term speculation, so with investors, we do not want to get caught up in that hype. We want to take a long-term, business-focused approach like we do with any other industry or company.
That 's what we' re trying to do here with the help of the world. They're at risk in their life. They do not have much of a track record, so there will be a lot of volatility.
And as a result, since there is not much in the way of a track record or present-day fundamentals, a lot of what we have to do is look at the qualitative factors. So get a sense for the leadership teams at these companies. Who's at the helm of the ship? Are there a healthy amount of insider ownership, because we want to be sure that the individuals who are spearheading these companies – if they do not have a whole lot of conviction or ownership in these companies, why should we as investors?
Then you also want to pay attention to the balance sheet. How much cash does the company have in the bank, because these are actually pure money, so they're unprofitable. As a result, they're burning a lot of cash, which is not necessarily a bad thing, because it's a good thing, it makes sense to invest in a production facility. A processing facility. Investing in marketing and brand building. But you want to be sure the company has enough cash to support that.
So these are some of the factors that we look at. Then, taking a long-term approach, we want to be sure that we're finding them in the future. We are not necessarily worried about where we will be in, or even a year. We're more interested in what the company is going to be in the industry. So trying to take a long look at that is a game that we're playing a different game than a lot of speculation and short-termism that's dominating the category right now.
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