Cannabis Investing Mistakes: Should you Invest in Established or New Cannabis Companies?

Cannabis Investing Mistakes

The year 2018 saw many, many cannabis companies debuting Initial Public Offerings (IPOs) on the stock market. Going public certainly has its perks, such as liquidation, broader stock options, amplified brand image, and access to risk capital, but is it really necessary to invest in a company that has recently made an IPO?

The process of initiating an IPO involves the selling of a privately held company’s stock to outside investors. While you could get rich from investing in a new cannabis IPO, there is a big risk attached. As a commodity, cannabis is subject to pitfalls. Investing in fast-rising pot stocks is appealing. After all, legal weed presents investors with an opportunity to make money from an untapped consumer market, but it’s difficult to be so sure about a new company that has no proven track record of success (let alone company history.)

Amidst the rise of cannabis reform, investors must ask themselves, “Should I invest in new cannabis IPOs or an established cannabis company?” From our point of view, you shouldn’t ignore the “old dogs” of the industry. Here’s why.

Cannabis Investments are Becoming More Common

It’s no secret that the cannabis industry is attracting investor attention. Estimated to become a $57 billion industry by the year 2027, cannabis has become the hottest commodity to invest in, not just for recreational purposes, but for medical too.

Last year, Statista revealed how 19%  of study respondents reported that they have invested in legal weed companies that both do and do not touch the plant. What’s more, in 2017, investments in both cannabis retail and cultivation topped $236 million.

With so many areas of the industry to invest in, such as agriculture technology, ancillary products and services, biotechnology, consulting services, cultivation and retail, products and extracts, industrial hemp and organic farming (to name a few), is it any wonder why investors love weed?

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2018 Welcomed Numerous Successful Cannabis IPOs

The first ever cannabis IPOs emerged just under two years ago. In November 2016, Innovative Industrial Properties went public, CanniMed followed in its footsteps at the end of the year. In addition to the aforementioned cannabis IPOs, numerous other bud brands have emerged on the public stock market this year.

They include Inner Spirit Holdings and Charlotte’s Web Holdings, better known as CW. Established companies, on the other hand, might not yet have an IPO. CW is a fine example of a well-established cannabis company that only recently went public, despite its inception in 2013.

The cannabis oil brand was developed in a bid to reduce epilepsy symptoms in a young girl called Charlotte Figi and managed to raise $100 million in its IPO. What established companies will have, however, is a proven track record that you can assess properly before judging its potential based on whether or not it has gone public yet.

Investors Can Feel Confident about Long-standing Brands

From the established company track record to the history of strong earnings growth, there are many reasons why long-standing brands are better investments than brand new, publicly-traded companies. Sure, an IPO is impressive, but a cannabis company that was established some years before the rise of legal weed will know a lot more about the industry as a whole. Moreover, if they’re still in business, their services are obviously still high in demand.

Well-established companies will understand what it takes to navigate the waters of the legal cannabis industry. For example, long-standing cannabis brand Nutritional High plans to build a 43,800 square-foot cannabis cultivation facility – a pretty good move, considering Canada’s weed supply is already drying up almost two months post-legalization

Another established cannabis company, Aurora Cannabis, has begun expanding into Mexico – they have invested in Farmacias Magistrales S.A, the first and only federally licensed importer of THC in Mexico. One of several acquisitions made by Aurora over the past 2 years is an investment in High Tide. This particular acquisition allows Aurora to expand its retail exposure.

There are many other mature cannabis companies and brands that are doing exciting things in the marijuana industry – they are especially beneficial to watch with the ramping up of legalization. 

Investors should approach cannabis investments with caution

With the above information in mind, investors ought to take heed and consider the true potential of a cannabis investment before jumping at the chance to invest in companies with IPOs. Ask yourself:

  •   What are the current gaps in the cannabis market?
  •   Is the market already too saturated?
  •   What about a niche area of the cannabis market?
  •   Where are the money-making opportunities?
  •   Which cannabis products are trending?
  •   What demographics are those products appealing to?

Sitting down and having a conversation with yourself is the best way to approach a 420 investment. Considering key factors, as well as monitoring specific product segments to analyze any alterations in market share, will enable you to make an informed decision.

“It is better to buy a wonderful company at a fair price than a fair company at a wonderful price,” American business magnate Warren Buffet once said.

Since Buffet’s investment portfolio contains an abundance of well-established companies, including Exxon Mobil (XOM), Walmart (WMT), Wells Fargo (WFC) and Coca-Cola (KO), – which recently made headlines for the fizzy drinks company’s potential interest in CBD-infused drinks – it’s advisable to take his advice and focus on well-established, strong cannabis brands.

Featured Image: DepositPhotos/ mindscanner

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