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Decades ago, an opportunity emerged in front of investors when the alcohol prohibition ended. Had somebody invested in alcohol back then and held it ever since, they would’ve virtually outperformed any index or industry in existence.
Now, such an opportunity has emerged again with the possibility of legalization of cannabis in many parts of the world and the United States. And investors are already going bananas over it.
But is it really the next big thing that can reward you with immense returns, or is it just another bubble? Should you be invested in cannabis stocks? If yes, how to select the best cannabis stocks to invest in?
We’ll be asking all these questions to Dan Ahrens, portfolio manager of AdvisorShares Pure Cannabis ETF (NYSE: YOLO) and AdvisorShares Pure US Cannabis ETF (NYSE: MSOS). Dan
is also the author of Investing in Cannabis: The Next Great Investment Opportunity.
So let’s learn from Dan how to select the best cannabis stocks.
How to Invest in the Cannabis Industry
It’s very exciting when a new industry appears, like cryptocurrency, cannabis, alcohol, or even the dot-com boom back in the 2000s, but there’s always a lot of volatility and risk involved when an industry is so young, and there’s not much known about it. So how do you go about investing in an industry such as cannabis?
Well, Dan regularly says that people should not invest in cannabis blindly because there’s a great deal of education that’s needed before you can really understand the dynamics of this industry.
There are huge disparities between different companies and even the make-up of different ETFs. As an ETF manager, Dan is a little bit biased towards ETFs as the best vehicle to invest in cannabis right now.
ETFs are easily tradable, they’re tax-efficient vehicles, and you can get a diversified basket of stocks picked by experts rather than trying to pick and choose yourself, especially in an extremely volatile and rapidly growing area like cannabis, where it’s easy to pick incorrectly.
Now, if you’re an experienced investor who knows the ins and outs of the CBD industry, then you can go about selecting your own stocks for your portfolio.
Which Cannabis Companies to Invest In
The cannabis industry not only includes companies that grow or create something, but there are many categories within, such as companies who support the ecosystem, like cannabis-focused real estate companies who lease-out land to other marijuana companies.
So looking at only one category of companies is not enough if you’re trying to build a well-diversified portfolio.
Dan’s AdvisorShares ETFs uses the word pure within their fund’s name because they only want to invest in companies that make the majority of their revenue or have majority of their assets tied to the cannabis business.
There’s also a handful of biotech or pharmaceutical companies that specialize in the cannabis space. A big one being GW pharmaceuticals in the UK, who have the first FDA approved cannabinoid-based product that is used to treat epilepsy, especially in children.
These are the kind of companies that you should own if you really wanna invest in the cannabis industry. What you should avoid owning is big tobacco or companies like Scotts Miracle-Gro because while they’re getting involved in the cannabis space, it’s still neither their primary focus nor primary revenue.
Another thing people need to understand is that opportunities exist on the US side of the border too. Even if cannabis is still to be legalized in half of the United States.
Currently, plant-touching US operators are not even allowed to list on major exchanges like Nasdaq. So what they do is they just list on a secondary exchange in Canada, and then they can be traded in the US.
Though these operators can be hard to get for certain investors, that’s where the biggest opportunities, in Dan’s opinion, exist.
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How to Select the Best Cannabis Stocks
In an area like cannabis, proper selection of individual stocks and active management are two crucial things. You can’t invest in all the stocks or even market leaders in an area like cannabis.
Also, investing in companies that you often hear about in news headlines and mainstream media is another way to lose money. Companies like Aurora, Tilrey, Cronos are some companies that are always in the CNBC headlines, but looking at their financials, they lose money quarter after quarter.
Aurora, for example, has continued to dilute shareholder value time and again to stay in the business. Still, it’s a very popular stock because people invest in cannabis blindly, especially when it gets headlines.
Dan’s secret sauce to selecting the best cannabis stocks is – none other than – balance sheet and earnings! Doesn’t sound like a secret? Because it isn’t one.
The problem is that most cannabis stocks over the last couple of years have not traded on things like balance sheets and earnings but hype and only hype. Stocks have gone up on hype, and they’ve crashed and burned on hype. That’s why balance sheets and earnings are the way to go.
Now, a question in the minds of some experienced investors would be, how do you even measure the balance sheet of these companies without them even having the ability to be legal in the majority of the United States, that too when the whole industry is so young?
Well, there is no definite answer to this question because a lot of cannabis investment is gonna be based on the opportunity in the end. The balance sheet and earnings are there to filter out companies that have the least chance of surviving in the long run.
So, what are those companies that Dan and his ETFs believe and invest in? Well, it’s time to drop some names. Here are some of Dan’s best cannabis stocks: Cureleaf, Green Thumb Industries, Trulieve, and Cresco Labs are some favorites.
All these are multi-billion dollar companies. They’ve been forced to operate in a very frugal manner and grow their businesses state by state. They control the licenses in the US, and very often, they’re profitable, or at least on a clear path to profitability.
How to Start With Cannabis Investing
As said earlier, one of the best ways to get your portfolio exposed to cannabis is ETFs like YOLO and MSOS, but what if you’re not down with that idea and wanna invest in individual stocks.
The best way to start investing, in that case, is to look under the hood of these ETFs and see what they’re holding. The best thing about ETFs is they have daily transparency, meaning you see what Dan is buying and selling in his fund a day after he does that.
Next, you look under the hood of the companies they’re holding, meaning looking at the balance sheet and earnings of those firms. In the cannabis industry, you can’t be fixated on profitability but what you can look for is the path to profitability.
Now, if you’re a complete novice in the cannabis market and wanna grow to advance on this potential once in a lifetime investment opportunity, then you got to read Dan’s book Investing in Cannabis: The Next Great Investment Opportunity, because, as he says, you can’t invest blindly in the cannabis industry.
The book talks about the opportunity, talks everything about the cannabis laws, it goes into what is proposed in the united states for reform, and what are differences between Canada and US laws.
The book also goes into some companies recommended in each area and why. So all in all, it’s a great read, which you can grab on Amazon and everywhere else. So please have a look.