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StaffJanuary 11, 2021


Editors Note: This is a guest post.

Whether or not you’re personally interested in the use or application of cannabis, there’s no doubt that this market is prepared to boom in the coming years. Strategically adding some stocks to your portfolio could generate healthy returns. 

Marijuana Market Overview

To say that there are certain connotations and assumptions associated with the marijuana market would be putting it lightly. Because of the historical treatment of marijuana and various state laws regarding production, sale, and consumption, some look down on this market and/or have reached misguided conclusions on the purpose it serves. 

This market is growing and, as we learn more about the products within the industry, it’s becoming apparent that the upside and opportunities far outweigh the risk and downside.

If you’re looking for a general overview or breakdown of the market, you can split it up into three areas:

  • Marijuana growers and producers: This includes companies that cultivate marijuana, produce cannabis products, and distribute products.

  • Cannabis-focused drugmakers: Including pharmaceutical companies and cannabis-based biotech companies.

  • Ancillary product and service providers: These are companies that support marijuana growers and sell related products, accessories, and experiences. 

“If you’re looking to buy equity in a marijuana-centric company, make sure you understand the market,” SmartAsset suggests. “Both marijuana products and marijuana stocks fall into different categories. In addition, though the product is now legal in many states, cannabis is still federally illegal. Therefore, this poses a considerable legal risk for investors.”

It’s also imperative that you understand the difference between the types of marijuana products that companies produce and sell. There are products that contain cannabidiol (CBD) and products that contain tetrahydrocannabinol (THC). Then there are products with both. CBD is legal in all states and does not produce a “high.” It’s commonly used to treat illnesses. THC, on the other hand, is the ingredient that gives a “high.” As such, it’s only legal in certain states at this time. 

Understanding each of these nuances will help you become a more informed and educated investor. 

3 Tips for Finding the Right Marijuana Stocks

Marijuana stocks are all over the board. There are stocks selling for hundreds of dollars a share, as well as dozens of penny stocks that have no clear trajectory forward. The key is to understand what you want in your portfolio and know how to find stocks that fit this bill. Here are some suggestions to help you be successful:

  • Study the Numbers

When investing in marijuana stocks, you should always research the management team, explore the company’s growth strategy and position in the competitive marketplace, read through the company’s financials, and research details such as how many warrants and convertible securities the company has issued.

You can also use certain technical analyses to predict whether a stock is underpriced or overvalued. Fibonacci retracement trading is a good one.

“Fibonacci retracement is useful because it’s a helpful tool to find patterns of movement and retracement between the highs and lows of an asset or contract,” RJO Futures mentions. “A Fibonacci level is created by taking two points from a chart, usually a high and low, and dividing those numbers by one of the ratios to create a key level.”

The more you learn to study stocks on a technical level like this, the less vulnerable you’ll be to emotional investing. In turn, you increase your chances of being successful over the long run.

  • Diversify Your Portfolio

When you’re investing in a market that’s as speculative as the marijuana space is, you have to be very well diversified. Spread your money out across multiple stocks, understanding that the upside on any one of your stocks is healthy enough to potentially offset losses on the others.

As you diversify, think about investing in different parts of the supply chain and market. This includes manufacturers, producers, drugmakers, recreational cannabis companies, etc.

  • Avoid Red Flags 

With as much potential as this industry has, there are always going to be scammers out there. Thankfully, the SEC has issued specific alerts related to marijuana stocks. If something looks too good to be true, it probably is. Do your due diligence and keep an eye out for red flags.

Be Smart With Your Investments

You’ll notice that we didn’t give you any specific stocks or tickers to follow. That’s an intentional decision because this market is changing so quickly. 

There are certain marijuana stocks that experts are bullish about, while there are others that many are bearish on. You won’t have to look very hard to find this information. However, at the end of the day, it’s up to you to make smart decisions based on your collective analysis. 

To provide you with “three hot stocks” to invest in today would be doing you a disservice. Put in the work, be disciplined, and consider getting a little exposure in this area to balance out a well-diversified portfolio.

StaffFebruary 8, 2019


A number of cannabis companies have gone public over the last several years, with the majority listed on a small exchange in Canada called the Canadian Securities Exchange (“CSE”). Many have done so via reverse takeover — a merger transaction in which a private company acquires a public shell company, merges into it, and then takes it over and changes its name — rather than resorting to an initial public offering, a more common practice in which a private company sells shares to the public and is then listed on a public exchange.

There are a number of reasons why companies choose to go public, including:

Fundraising: It enables companies to raise large(r) amounts of capital from external investors.

Publicity: Going public is a watershed moment, raising a company’s profile among investors, customers, competitors, and the general public.

Credibility: Becoming and being a public company is somewhat of a status symbol. It shows that you’ve “made it” and can handle the rigorous disclosures and transparency required by investors and regulators.

Liquidity: It allows longtime employees and investors to “take some chips off the table” by monetizing some or all of their holdings.

Currency: Public stock can more easily be utilized for acquisitions.

These last two aspects, liquidity, and currency were analyzed for the 30 largest CSE-listed companies with U.S. operations (and compared against a group of 30 U.S.-listed micro-cap biotech, brewing, vitamins/supplements, and natural food companies) to assess the benefits of these listings.

As you can see in the chart below, there is a meaningful lack of liquidity for the CSE-listed companies. The comparable stocks have nearly three times the average daily trading volume of the CSE-listed cannabis companies. Also, there is a long “tail” with the CSE-listed stocks. The overwhelming majority have extremely thin volume — some had days where literally zero shares were traded — with just a handful garnering meaningful volume.

When a company is doing a follow-on equity offering, the sizing is important. If a company sells too much stock relative to daily trading volume, it risks flooding the market and driving down the stock price. A sanity check also occurs, looking at how many days of trading it would take for all the newly sold shares to trade. Five to 10 percent is the norm, though higher levels are also possible. Given the thin trading, the ability to do a block trade (selling a large lot of shares to a third party) is also limited. In an M&A situation, this matters a great deal – the seller becomes largely “stuck” in the company and can’t easily monetize their holdings. In fact, when one looks at several of the recent all-stock acquisitions, it appears as if it will take years for the sellers to convert their shares into cash.

Any company contemplating listing on the CSE or another foreign exchange should consider pursuing status as a “foreign private issuer” and how that may impact liquidity. There are some substantial potential benefits to being a foreign private issuer, including faster market access and less onerous reporting requirements. But maintaining foreign private issuer status can create additional liquidity concerns for some shareholders.

A foreign private issuer must either have the majority of its voting stock held by non-U.S. residents or operate outside the U.S. The only option for U.S.-based cannabis companies is to ensure the majority of voting stock is held by non-U.S. residents. Determination of what the majority of voting stock means can be based on either voting power or a quantitative number of shares.

Companies often create a class of super-voting, super-conversion compressed preferred stock that is exchangeable into publicly traded common shares. The preferred stock class — sometimes called Class A stock, but naming conventions vary from company to company — can be set up so that, on a converted basis, the holders of the preferred stock have the same economic and voting rights they would have had if they held common stock instead. But a company must usually impose conversion restrictions to ensure foreign private issuer status is maintained. If too many people convert at the wrong time a company can lose its foreign private issuer status.

Anyone receiving compressed shares should carefully review the terms of such stock so they can be aware of when and how they can convert into freely trading common stock. It may not always be possible to freely convert such preferred stock and the preferred stock may not be as easy to sell as the common stock, creating another potential liquidity issue that should be managed up front.

David Lechner is a Chief Financial Officer with $25 billion of M&A and capital markets work. He consults with clients on due diligence, acquisitions, integrations, financial reporting, and operational improvements. Originally from Toronto, he now resides in Denver with his family.

Charles Alovisetti is a partner and chair of the corporate practice group at Vicente Sederberg LLC based in Denver. He assists licensed and ancillary cannabis businesses with corporate legal matters, and he has experience working with clients on a broad range of transactions.

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