420 Day: Is it worth investing in cannabis?

420 Day: Is it worth investing in cannabis? The financial experts at Saxo say ‘positive vibes’ have returned amid global changes – but stocks remain ‘expensive’; here, they offer up their advice on investing in the cannabis sector

The date of 20th April (420) has become an established day around the world for people to celebrate the use of cannabis, although its legal status does vary across the globe. The cannabis industry has continued to be considered as an attractive option for investors due to the potential that many believe it has for rapid growth over the next few years.

Cannabis as an investment talking point has been boosted by Germany’s partial decriminalisation of marijuana use and support in the US by Senate Majority Leader Chuck Schumer for the SAFER Baking Act – which aims to expand access for state-legal cannabis businesses to use traditional banking and financial services.

But is it a worthwhile investment? Peter Garnry, Head of Equity Strategy at investment platform Saxo, has said that while ‘positive vibes’ may have returned with increasing support for the sector and Germany’s new legislation could prompt ‘improved conditions’, there are ‘ongoing profitability challenges’ within the sector.

While it may be deemed a controversial area to invest in for some, Saxo have also offered up some key advice on what to know before investing, what the risks are, and the investment options for the cannabis industry.

Peter Garnry, Head of Equity Strategy at Saxo, says: “Cannabis stocks are back on the radar following two significant events in the past month. Firstly, Germany has legalised recreational cannabis, and secondly, Senate Majority Leader Chuck Schumer has thrown his support behind the SAFER Banking Act. The leading cannabis index has witnessed a 22.4% rise this year, outperforming the 7.8% increase of the MSCI World Index. While the positive vibes have returned, cannabis stocks have plummeted 95.5% since September 2019, while the MSCI World Index has enjoyed a 67.7% gain during the same timeframe. This stark contrast highlights the ongoing profitability challenges within the cannabis industry.

“SNDL, a major player in the cannabis index, is anticipated to reach over $1 billion in revenue by 2025. However, the company reported a loss of $115 million over the last 12 months, underlining the industry’s profitability issues. Similarly, Tilray Brands, another significant cannabis company, is forecasted to exceed $800 million in revenue for its financial year 2024 (ending 31 May 2024), despite facing a $158 million loss.

“The opening of the German market and the potential for easier financing access over time could improve conditions for the cannabis industry. However, despite significant price drops in recent years, many cannabis stocks remain expensive, reflecting lofty future expectations. Therefore, investors are advised to conduct thorough due diligence before investing in cannabis stocks.”

What do you need to know before investing?

While there are various opportunities to invest in the cannabis industry, there are also risks involved. The sector faces numerous challenges, and it will have to overcome these to flourish and achieve sustainability.

Shifting landscape

An ever-present challenge for the cannabis industry is the rapidly changing legal landscape. Despite being legalised in various places, the laws are not standard across the board. This means that cannabis companies that want to operate on a wide scale need to adjust their business and marketing model depending on the rules in each location they operate in.

Bigger brands moving in

Smaller start-ups in the industry could be at risk of getting swallowed up or muscled out by bigger, well-established brands from other addiction industries including alcohol and tobacco. There has been an increased interest in the cannabis industry from these sectors and companies like Anheuser-Busch InBev, Pabst Brewing Company, and Constellation Brands have all begun to invest in cannabis-related products.

Risks for investors

As most seasoned investors know, stocks with high potential also come with high risk, so you should do thorough research and use as many sources as possible to help you make informed decisions. Below, we’ve listed a couple of the key risks that could cause major issues for investors.

No guarantee of success

Many companies hedge their success solely on the potential they believe the industry has, even though new start-ups often fail. For instance, some of the early medical cannabis companies were unable to provide investors with information about necessary licences and barriers to entering the industry, and subsequently lost their capital because of this.

Legislation could change

The government legislation is still being streamlined in many of the places that have legalised cannabis, and there could be a chance that some governments backtrack on these new laws.

For example, if new research emerges that suggests cannabis isn’t as beneficial for medical purposes as scientists once thought, governments may stop using it for medicinal purposes.

Likewise, if there are other adverse effects from the legalisation of cannabis over the course of a few years, governments could adjust their laws again. Investors should also be aware of how pricing and taxation could change, how share prices can be inflated if there are high levels of interest; and the risk of dilution as companies try to expand to meet demand.

How can you invest in cannabis stocks?

If you want to invest in cannabis stocks, you can do so with most brokers. Here are some investment instruments you may want to look into:

Cannabis stocks

It’s possible to buy shares or stocks directly in companies that operate within the cannabis industry. These companies can work specifically within the subsectors previously mentioned in this guide. Investing in individual stocks allows you to focus on the share price movements of specific companies.

Cannabis ETFs

ETFs (exchange-traded funds) are investment funds traded on stock exchanges, similar to stocks. A cannabis ETF holds assets in various companies within the cannabis industry, providing diversified exposure to the sector. This can mitigate risk compared to investing in individual cannabis stocks.

If investing in cannabis stocks interests you, make sure you do careful research before you get started so you can make the most informed decisions when you start. There is no doubt that the cannabis industry is one to watch, but there is high risk involved due to the lack of certainty about where it will be in the future.