How to invest in the South African cannabis industry.
The “legal” dagga industry is drawing more attention than ever before thanks to legislative changes.
The cannabis industry is made up of companies that either support or are engaged in the research, development, distribution, and sale of medical and recreational marijuana. Cannabis has begun to gain wider acceptance and has been decriminalized in South Africa for personal use.
Some of the biggest companies in the marijuana industry include Canopy Growth Corp. (CGC), Aurora Cannabis Inc. (ACB), and Tilray Inc. (TLRY). Many big marijuana companies have continued to post sizable net losses as they focus on investing in equipment to speed up revenue growth, which remains strong despite the pandemic-spurred economic downturn.
Since many of these large international cannabis companies are losing so much money for their investors, South Africans are looking for ways to invest their money in South African dagga companies.
These developments naturally make investors around the world question whether investing in cannabis-related stocks is worthwhile. The weed market is very young, and therefore highly volatile, and therefore susceptible to many ups and downs in the nearest future. It will take an additional couple of years for it to stabilize, which is something you need to keep in mind when planning out your investments.
The general trend seems to be that it will continue to grow, as proven by the continuous passing of legislation in countries around the world, liberalizing the restrictions on the stuff. This allows entrepreneurs and investors alike to get creative with their money and come up with exciting new ways to consume and make use of cannabis.
Experts predict that by 2022, the marijuana market will reach $32 billion — that leaves plenty of room for improvement and growth, making weed stocks a perfectly viable option for investments.
The cannabis industry is expected to triple in the next five years – and many investors are looking to profit. As South Africa and more African countries decriminalize or legalize cannabis and/or its components, there are loads of opportunities for entrepreneurs and existing companies.
But as in any nascent industry, there are also loads of risks and bad actors. Whether you’re a first-time investor or a seasoned veteran, it pays to understand all of the moving parts. This guide will get you up to speed quickly, and we’ll share a couple of the marijuana companies that we watch closely.
How to invest in cannabis stocks
Whether you decide you want to invest in cannabis stocks, or trade on their price, there are a variety of steps to consider before opening your first position:
- Understand the different types of marijuana products
- Learn about the types of cannabis stocks
- Understand the risks of trading or investing in cannabis
- Choose the asset you want to focus on
- Decide if you want to trade or invest in marijuana stocks
- Pick your style and set your timeline
- Open and monitor your position
The Seven Steps to Investing
Step 1: Research the company
Always start by researching the company or companies you’ll be investing in. Check JSE filings and other documents and the historical share price etc.
Step 2: Determine the amount to invest
As a rule of thumb, never invest more than you can afford to lose. While good research will often lead to strong returns, this will not necessarily be the case. Stocks are volatile and contingencies sometimes unpredictable.
Step 3: Decide on your timeline
Deciding on when to buy and when to sell is crucial. Try and figure out what your thresholds are beforehand. So, for instance, establish a rule: “if the stock falls below X or surges above Y, I’ll sell.
Step 4: Pick a broker
Once you’ve gone through the initial steps, you’ll be ready to actually buy your shares. Sign up with www.sashares.co.za
Step 5: Buy the stock
This step may sound self-explanatory, but it’s a bit more complex than it seems.
“There are generally two types of ‘buy’ orders: market order and a limit order. A market order will execute the purchase at the present market price, while a limit order will only execute if the price falls at or below the limit price. Although a limit price might give an investor a lower price of entry, there is no guarantee that the limit order will execute.
Step 6: Sell the stock
Once you feel you’ve generated enough returns from a stock, it’ll be time to sell. Again, you can sell the stock with a market order or a limit order. Use your proceeds to reinvest or just spend them. Life is meant for living!
Investing large amounts of money into a volatile market should always be done with extreme caution. This is a move that needs to be thought through. Should you invest in one of the big boys, like Aurora, Tilray or Canopy Growth, or move your money towards a smaller, but more exciting local enterprise like Labat the choice belongs to you.
Then there is also the option of shorting cannabis stocks. Shorting cannabis stocks was a billion-dollar idea in 2019!
Though 2019 was a brutal year for weed stocks in Canada and the U.S., that meant it was a stellar year for short sellers, who harvested nearly $1 billion from shorting the top 20 cannabis companies according to a new analysis.
The question is: why?
Cannabis stocks still face the same problems they always did: huge losses, questionable goodwill and decelerating revenue growth. For example, in its most recent quarter, Aurora Cannabis Inc(TSX:ACB)(NYSE:ACB) posted a $137 million net loss and lower revenue growth than in prior quarters. Other cannabis companies are posting similar results, so it’s not clear why this sector is rallying right now.
In light of this, it’s tempting to consider shorting cannabis stocks, which are still as overpriced as they ever were relative to sales. Now their revenue growth is slowing down. Certainly, there are some opportunities to be had by shorting them.
Maybe — and maybe not. While most dagga stocks appear overpriced right now, it’s probably not a great idea to short them. An irrational rally can last a long time, and the potential losses are unlimited. In light of this, you’re probably better off avoiding marijuana stocks rather than shorting them. Right? Maybe? Maybe not?
Why shorting is dangerous
Shorting stocks is dangerous because of the potential for unlimited losses. When you buy a stock with your own money, your loss is limited to the amount of money you invested.
When you short a stock, you borrow it, which means you have to pay back the shares later. There’s no limit to how high a stock could go, so your potential losses when shorting have no theoretical limit.
While hedge funds frequently use shorting and other complex strategies, these are not generally recommended for retail investors. Even marijuana stocks, which appear poised for another dip, could rally unexpectedly. So shorting them could cost you some big money.
But is it a buy, hold or sell scenario?
*Please note this is not financial advice and before investing in any company we advise consulting with your registered financial advisor.