Will Cannabis Investments go the way of Yahoo?

Posted 28 Sep 2019 by Patricia Bell, PFP


Do you Yahoo? Are you (like me) old enough to remember this slogan from the mid 90’s? It was the catch phrase for searching the “world wide web,” a database with a searchable index of pages supplemented with its directory of websites.

Since its legalization in Canada almost a year ago, one of the questions clients regularly ask about is whether their portfolios include mutual funds with investments in cannabis-based companies. Grandmas and grandpas are experimenting with something that what used to be criminal and even subversive.  Edibles are soon to be legal, as is vaping. Liquor producers are exploring how to incorporate recreational cannabis into your favorite beer or cider. With so many options shouldn’t our portfolio managers be taking advantage of this trend?

The reality in a new industry is often different than media hype would lead you to believe. In fact, in the first year of legalization, the shares of what were the 10 largest Canadian cannabis producers by market capitalization have yielded an average negative return of more than 57% for investors. (Financial Post) Companies couldn’t handle consumer demand. A lack of inventory meant massive delays even while companies explored aggressive expansion plans. Ever-changing laws and regulations continue to raise more concerns. Cannabis producers are where tech companies were when they first emerged. So, while they may represent an amazing growth opportunity, they’re attended by the same inherent risks and challenges. Fund managers are, understandably, reluctant to invest in such a volatile product.

Think back to the landscape of internet-based companies back in 1999-2000; how many of those companies are still operating today? The current state of the cannabis industry is in a similar state of “figuring itself out,” as laws and distribution channels are perfected. Opportunities exist, but risk is abundant.

So, do you Yahoo? Or ask Alexa?

 

Sources:

Ferreira, Victor. 09 October, 2019. Feeling burned: The first year of legal cannabis has been a complete disaster for investors. https://business.financialpost.com/cannabis/cannabis-business/cannabis-investing/feeling-burned-the-first-year-of-legal-cannabis-has-been-a-complete-disaster-for-investors