How to invest in cannabis stocks

Global cannabis markets are experiencing attractive growth in terms of sales, companies, products, and the opening of new markets through legalization in various countries. This situation is attracting investors' attention and presents what appears to be a significant investment opportunity with high growth and risk. Given this scenario, we share an approach that could be used as a framework to begin the journey toward investing in CBD and the cannabis industry, while recognizing the various risks.

1. Understanding the types of cannabinoid-derived products

• The first thing is to understand the main categories of CBD products that exist:
• Medical cannabis products: Medical cannabis is legal in most states in the United States, and the process for acquiring it begins with a prescription from a specialist to treat certain conditions such as anxiety, pain, stress, and nervousness. Naturally, these companies are the best places to buy medical cannabis stocks.
• Adult-use cannabis products: This category focuses on recreational products, and its penetration in terms of legalization is lower due to the stigma that persists in society.
• Cannabis products for wellness use: This category is not recognized in legislative texts; however, it is being created and supported by various marketing strategies for the placement of products primarily based on CBD or for topical use, seeking a feeling of well-being and comfort, further removed from recreational use.

2. Know the different types of cannabis stocks that exist 

• Cannabis cultivation and retail companies: These companies grow cannabis in greenhouses (indoors) or outdoor facilities. These companies harvest the crops and distribute them to the end customer, either through their own dispensaries or as suppliers to retailers.
• Cannabis-focused biotech companies: These biotech companies are focused on developing medicines using cannabinoids as more natural methods for therapeutic purposes.
• Companies providing ancillary products and services in the supply chain: These companies are dedicated to the CBD industry for logistics purposes. They focus on providing raw materials to cannabis growers (lights, hydroponic systems, pots, packaging, logistics).

3. Understanding the risks of investing in cannabis stocks

Naturally, all investments carry a degree of risk, and cannabis stocks are no exception, as they carry specific risks:

Legal and political risk: Although we can argue that political risk is diminishing as legalization progresses worldwide, we currently find ourselves in an environment where the industry's operations remain uncertain. And this reality obviously affects investing in cannabis stocks. We have a situation where banking in the United States for cannabis cultivation and sales companies is not permitted because it is not legal at the federal level.

Supply and demand imbalance: Due to the opening of new markets and the entry of new players into the industry, we can observe imbalances in supply and demand, which causes producers to experience very high variability in their sales/profits. This often leads to periods of volatility in cannabis stock prices.

Penny Stocks: Many of the stocks we find today are considered penny stocks, meaning their market capitalization is lower than that of a company listed on the S&P 500, and their share price is typically less than $5. They lack a track record that would make the market trust them, and they tend to be highly volatile and speculative. Furthermore, they can have low liquidity, which makes it risky to enter and exit at a specific price.

Financial risks: Many companies pursue an aggressive strategy of market dominance. However, this often entails high levels of CAPEX, which compromises profitability and cash flow. This approach often leads to capital raising via convertible debt, resulting in capital dilution and a drop in share price.

4. Different considerations when searching for cannabis stocks.

• Know the strategy and its competitive advantages in the market in which the investments will be made.
• Find a brand with a favorable financial situation, i.e., low debt and positive unit flows as the main factors.
• Know the terms and conditions under which the company acquires debt. For example, if it raises capital via convertible debt, the company faces a higher risk of dissolution if these options are exercised.
• Companies have an advantage in terms of their production cost per gram, so their profitability is positive compared to their competitors.

5. How to control risk

Understanding your risk profile as an investor defines many of the answers to the question of how you manage risk. It's important to define the timeframe and underlying assumptions behind your decision. Currently, cannabis company stocks are considered high risk due to their volatility and the short execution time of their strategy. There are undoubtedly companies that are riskier than others, as well as funds (ETFs) that reduce your risk by offering diversified baskets of cannabis stocks.

Regardless of whether you decide to invest in a specific stock or a diversified fund, it is important to understand the vehicle and define an amount you are comfortable risking when investing in cannabinoids.

6. Continuous monitoring of industry dynamics

The cannabis industry, being in its early stages, is experiencing significant changes in the legal and commercial framework of each country, with the United States being undoubtedly the most representative example.

It's important to closely monitor the stocks we acquire, as well as the industry in general. An example of something that could have a positive impact on the price and valuations of cannabis companies in the United States would be the federal legalization of cannabis, as well as the possibility of banking industry operations that currently operate in cash.

We are witnessing the beginning of a powerful industry that promises exponential growth. Proper selection and monitoring should result in good decisions for investing in CBD in the medium and long term.

7. Live investments in markets like Mexico

Direct investments are those in which you invest directly in the company. These investments carry a much higher liquidity risk, meaning that when you want to sell the shares, there's no secondary market where you can quickly do so. They're also typically the most profitable if their business model works, which is why many people choose to invest in CBD through this method.

From the company's perspective, they often seek out capital, synergies, and specific investor profiles that they can leverage on their business model.

You might be interested in: This is what the legal cannabis business will look like in Mexico.

In markets like Mexico, where we are at the beginning of the industry, investment project efforts seeking capital are beginning to emerge. In this sense, it is very important to thoroughly understand the strategy and the parties involved in order to find good projects and rule out those that are simply seeking to raise money through quasi-fraudulent schemes. The risk involved in this type of market, as is the case in this Latin American country, must be carefully assessed.

If you're an investor willing to get involved in the company's journey and contribute something as added value, this type of investment is undoubtedly a good option. If you prefer risk exposure without personal involvement, stock market investments are the best and safest option without a doubt.

Headquartered in Guadalajara, Jalisco, Canncura seeks to become the company with the most trusted dispensaries and consumption centers in Mexico. It offers personalized consulting and a team trained to understand each client's specific needs with real-world information. It also offers product tracking through its own app, generating specific recommendations so each user can enjoy a more educated, moderate, and responsible CBD product consumption.

Canncura emerged as a project by a team of passionate Mexican entrepreneurs who sought to support the cultural change that will be generated by legalization and break the paradigms that stigmatize the use and consumption of cannabis and its derivatives.