Investing in cannabis stocks can be a daunting business, particularly if you’re not familiar with the industry. There can be a whole host of terms and phrases that can be difficult to get your head around, and even with the ones that are relatively self-explanatory, it can be just as tricky to judge whether a company is worth your time, and more importantly, your money. Here, we’ll take a look at what important aspects make a worthwhile pot stock investment.
The first and arguably most telling figure about a pot company is its production capacity, and this is pretty straightforward: the more cannabis a company produces, the more it can sell. That may sound oversimplified, but it’s a hugely important factor to remember when investing in cannabis. Headlines were made during the first few days and weeks of legalization as cannabis retailers ran low on stock and the country nearly ran out of legal weed. With the second wave of legalization arriving next month, retailers will be keen to avoid the same mistake.
A phrase you might see a couple of times is “top-tier growers,” which is a term used to describe the leading cannabis cultivators, usually with a production capacity over 100,000 kilograms per annum. At present, Aurora Cannabis (TSX:ACB) (NYSE:ACB) tops the pile for top-tier growers, with a production capacity of 700,000 kilograms, followed by Canopy Growth (TSX:WEED) (NYSE:CGC) with about 500,000 kilograms. That’s a lot of pot.
While production capacity is an obvious indicator of the size of a pot stock, success can come down to the diversity of its product. While dried cannabis flower remains the most popular pot product of choice for the majority of consumers, the market is seeing an increasing shift in demand for alternatives to smoking. For cannabis stocks to really take advantage of this, it’s important to offer a diverse range of products such as edibles, vapes, tinctures, and topicals, to name just a few.
Legalization 2.0 paves the way for an explosion in the market for smoking alternatives, and some cannabis companies look better poised in this regard than others. For example, Cronos Group (TSX:CRON) (NASDAQ:CRON) may not be a top-tier grower, but it aims to be a major producer of vape products, a sector that is expected to catch up with dried flower’s market value of $8.5 billion by 2022.
Vertical Integration or Specialization?
If you’re familiar with business operations in any market, you’ve probably come across these terms before, but let’s remind ourselves what they mean in the context of cannabis stocks. Vertical integration is when a company owns every aspect of its supply chain. So in the case of pot companies, it’s often referred to as “seed to sale,” in that one company handles every aspect of production from planting the seed all the way to selling the finished product to a consumer.
It’s a promising business model for pot companies as it facilitates a more seamless production and supply process, as well as leveraging economies of scale and producing higher margins. Aurora, the world’s largest pot company, is vertically integrated because it has the financial mite to invest in or acquire smaller firms that contribute to the production process.
Companies that only work on one aspect of the process are specialized in that field, and it can be an equally promising business model as it represents an opportunity to perfect what the company does best. For example, Medipharm Labs (TSX:LABS) (OTCQX:MEDIF) and Valens GroWorks (TSXV:VGW) (OTCQX:VGWCF) are two market leaders in the area of cannabis extraction services, and their specialties are highly sought after due to the rising demand for cannabis derivatives. Both stocks have made eye-watering gains in the last 12 months for being experts in their field.
So that’s our beginner’s guide on some important things to look out for before investing in cannabis stocks that should inform your investment choices a little bit more. Happy hunting!
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