The Canadian Cannabis sector definitely has grown in the last couple years. When we first started investing it was easy to do research and keep track of the sector because there were only a few publically traded companies to choose from, now 3 years later the RYG watchlist has approximately 160 Canadian companies and the list keeps growing. Every time a new company goes public it potentially dilutes the sector, seeing how it is another company that investors have to choose from. In terms of resources, there were also only 2 main facebook groups that we would use Marijuana Stock Traders and MMJ investing to keep up with the latest news and contribute research for different companies as a community. Most companies didn’t even have a facebook page or even website, you had to find the information through the CSE or Sedar. Now investors have taken upon themselves to maintain 1 closed group for each company and there are many new closed investing groups trying to help investors. We are currently in over 40 groups which at a certain point we feel that it is hard to keep up with all the information.
The addition of the cryptocurrency hype and the new blockchain sector is another reason why the Cannabis sector recently fell flat. Many investors were investing in companies that they did not understand and saw huge gains followed by huge loses. Investors thought that in a short period of time they would become rich and now almost a year later are stuck averaging down and carrying huge baggage.
Private placements, Bought deals, and convertible debentures are all ways that companies are able to raise capital from investors. In return investors receive shares and warrants at a set price, most of these deals have a 4 month hold, some of the bought deals have a 30 day hold and some private companies can hold the shares for a longer period of time to allow their share price to increase. So far billions of dollars have been invested into the cannabis sector. Unfortunately, some companies do too many private placements in a short period of time which after the hold causes months of selling pressure. Or the industry leaders do bought deals that are worth hundreds of millions of dollars and that causes a lot of money to be locked away for a period of time. Normally investors sell their other shares to be a part of these deals which cause the rest of the sector to be down.
Clearly, for a new investor investing in the Cannabis Sector, a feeling of “where do I start now?” is bound to happen, and now with all these different companies and different groups, one might get overwhelmed when investing in this Sector. Our suggestion for investors is
1) Find out which company you would like to invest in: really dig deep view the companies Facebook, Instagram, Twitter account, and make sure to view their investor’s presentation. Also with time view the companies recent MD&A on Sedar to get an understanding of the companies financials
2) Analyse share structure and market cap versus other companies in the sector. The higher the outstanding shares the more volatile the share price will get. Do not just look at share price because 2 companies may have the same share price but won’t have the same market cap.
3) Understand how the sector works a) how long on average does it take to get a cultivation or sell licence b) what is an acceptable share price/market cap when receiving a licence
4) Look at the past charts and see how the sector trades per season. From experience, the worst times of the year would be during February and March usually sales are slow seeing how everyone just finished spending money on Christmas and New years, and construction sites are usually put on hold in Canada. July is also really boring, with only 4 licences ever given in the month of July, and most investors being on vacation, the sector experiences low volume which causes lower support levels. Normally we start seeing a rally in August and we see new highs in November.
For example to see how a small cap company trades. we’ll use THC Biomed (CSE: THC): It used to trade at around 20cents and then ran up at the end of 2016 to see new highs, then it just fell until the summer hitting around 30 cents, and then back up towards the end of 2017, now we are seeing the same trend for 2018
Canopy Growth (TSX: WEED) which is an industry leader also experienced depreciation of share price in the summer months.
Here is a table which shows the share price of a few companies that were public in 2017. It compares their share price on January 1st, 2017 to July 2017 and then from January 1st, 2018 to today’s share price. The trend is similar in both years a significant drop in share price in both cases. Hopefully this year with legalization 3 months away we see a lot more institutions investing in the sector, and in 2019 we will be looking forward to the legalization of edibles which will be another revenue stream.