Amateur Investors are Bullish About Cannabis. That Has the Pros a Little Worried.
The cannabis industry is certain to grow. That company you own shares in is not.
Retail stock investors are bullish -- perhaps to a fault -- about the prospects of publicly traded cannabis companies, according to a recent survey of 250 people who currently own marijuana related stocks.
The survey, conducted in March by KCSA Strategic Communications, found that 90 percent of the investors reported their portfolios had appreciated, which might explain why 50 percent said they had sold non-cannabis stocks to buy cannabis stocks. “This is a fundamental shift taking place in society, right before our eyes, it’s exciting, it’s once in a lifetime, it’s lucrative and they want in on it,” said Lewis Goldberg, managing partner at KCSA and host of The Green Rush podcast.
The enthusiasm for cannabis has investors wisely spreading their money around -- 52 percent said they own six or more cannabis stocks while 40 percent own 10 or more -- but is also leading them to perhaps concentrate excessively on the sector, if not just one company in the sector. “Retail cannabis investors are significantly overweighting cannabis, which comprises more than a quarter of their overall portfolio, according to 40 percent of respondents,” KCSA noted in a report of the survey findings.
Eighty percent of the investors surveyed said they plan to hold onto their cannabis investments for between one and ten years. “They understand the real value will be unlocked in years, not days or weeks,” Goldberg said.
The survey found that individual investors show no concern that cannabis remains illegal under federal law. They believe the end of prohibition is inevitable and don't believe the federal government will switch policy to crash the state-legal cannabis industry, which employs hundreds of thousands of people and has already attracted many billions in investments.
“I think most Americans believe full federal legalization is a question of when, not if,” Goldberg said. “People are consuming (cannabis) and investing in it because they believe in it.’’
Professional investors specializing in cannabis are less than thrilled by the enthusiasm of amateurs rushing to get in on what they think is the ground floor of the cannabis boom.
“Our biggest fear is people get sucked into the mania, they lose money and then think the industry is a joke when we know it’s real,” said Morgan Paxhia, who co-founded Poseidon Asset Management with his sister Emily Paxhia. “The general trend is this (industry) is very fast growing and there are very few other industries on the planet that have this sort of growth potential but it’s not a straight road. There are events that are impactful and you can’t just assume they will always keep going up.”
Paxhia noted there are more than 300 publicly traded companies that can be broadly lumped into “cannabis.” They vary so much by sector -- ancillary businesses like payment processors, manufacturers of needed equipment like grow lights, growers, medical marijuana and adult use, multi-state operators that might be retail dispensaries or vertically integrated companies, CBD and hemp, etc -- and by the capabilities of their management team that stock selection is probably trickier in cannabis than in more established industries.
Sean Stiefel, founder and managing partner of Navy Capital, warned that knowing a company is a “cannabis company” is not much to go on. The variables to consider are many. Publicly traded Canadian companies are “crazy” expensive, he said, while publicly traded US companies are more reasonably priced at around 20X EBITDA (“earnings before interest, taxes, depreciation and amortization,” a standard metric for evaluating company performance), though even the US stocks are relatively expensive because there are limited choices on US exchanges.
Stiefel doesn’t think much of buy-and-hold as an investment strategy simply because the investor is hopeful they have bought shares in the cannabis equivalent of Apple or Google at the dawn of the tech boom. “I think holding anything for 10 years blindly is silly,” he said. “Have you owned anything for 10 years other than your house?”