Pot or Not – Should You Invest in Flower Power?

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CIBC’s Jennifer Schell provides some tips on how to crush the cannabis green rush

Jennifer Schell | May 15, 2018 | SmallCapPower: My intention was to write this post about marijuana investments in time for 4/20, but then I got lost in thought: to pot or not? And like my thoughts, you too can get lost in all of the smoke when trying to figure out which cannabis company doesn’t stink.

Cannabis, commonly known as Marijuana or Marihuana, contains Cannabinoids, which are the bioactive components of the cannabis plant that affect our cannabinoid receptors in the body and they come from the female dried flowers. Although there are more than 100 different variations, the most popular ones are THC (tetrahydrocannabinol) and CBD (Cannabidiol). The THC produces the “high” feeling, whereas the CBD is touted as having other health benefits and uses, without inducing the psychoactive high.

Canada vs. Everybody

Canada has proposed Federal regulation through the Cannabis Act (Bill C-45), giving us Canadians a leading global competitive advantage in the marijuana sector. Investing in the cannabis space has many legal requirements and risks. In this budding industry, disclosure and regulation are highly beneficial to its development.

Publicly-listed securities are a legal way to invest because they must adhere to strict reporting guidelines, legal structure and have their financial statements audited by reputable accounting firms.

Canadian stock markets, such as the Canadian Securities Exchange (CSE) and the Toronto Stock Exchange (TSX), offer public listings for investors to participate in this blossoming trend. This is of value to investors since they can take part in the projects with minimal invested capital.

Canna-preneurs have two markets to choose from: recreational and medical. The recreational segment will likely be “experience” focused, while the medical segment will use both the THC and CBD components of the plants to heal various ailments.

How to Crush the Green Rush

Acknowledge your risk appetite. Be aware of your aversion to loss. This sector is still in its infancy. Should you make a purchase on the market, the price of the security may experience frequent highs and lows. You might have the munchies for returns now, but you will have to deal with the bloat in your gut should your investments not turn out the way you anticipated.

Say nope to dopey investments. Know that dispensaries and “Compassion clubs” are illegal. So, when your neighbour asks you to take part in his or her “business venture,” it would be wise to steer clear of these rogue operators unless they are registering as a legitimate LP (licenced producer.)

But I want to save money and be authentic! Could you grow pot? Yes. It will become legal for you to grow your own plants, but you can’t resell your product without a proper license. If you feel so inclined for the authentic horticultural experience, Health Canada has a gardening guide – online. Be mindful that a do-it-yourself pharmaceutical operation reeks like roadkill and can be hazardous to pets and children.

Leave it to the marijua-men. To ensure quality control, leave the growing to agriculturally-trained scientists and experts. According to the Health Canada Website, there are 104 licensed producers, called LPs for short, the majority being in Ontario. These businesses are responsible for providing safe, high-quality cannabis for medical and recreational purposes. Be mindful of the management. Make sure that there is capital market expertise on the team, cash available and proper financial structuring of the corporation. Be on the lookout for frequent news releases demonstrating positive business activity – such as strategic partnerships with distributors that can boost the potential of the company.

Buyer Beware. When assessing a company, be mindful of costs, such as hydro and the proper outfitting with greenhouse technology. Health Canada has strict specifications for product control. Humid growing conditions are incubators for mould, mildew and disease. If the contaminants are too high, the crop will be cooked. Poof! There go the profits. Maintaining a consistent supply of product available for repeat customers and dosing are good metrics for a successful operation. When in doubt, contact your trusted financial professional for advice.

If you are currently a CIBC Wood Gundy client, please contact your Investment Advisor.

This information, including any opinion, is based on various sources believed to be reliable, but its accuracy cannot be guaranteed and is subject to change. CIBC and CIBC World Markets Inc., their affiliates, directors, officers and employees may buy, sell, or hold a position in securities of a company mentioned herein, its affiliates or subsidiaries, and may also perform financial advisory services, investment banking or other services for, or have lending or other credit relationships with the same. CIBC World Markets Inc. and its representatives will receive sales commissions and/or a spread between bid and ask prices if you purchase, sell or hold the securities referred to above. © CIBC World Markets Inc. 2018.

Jennifer Schell is an Investment Advisor with CIBC Wood Gundy in Toronto. The views of Jennifer Schell do not necessarily reflect those of CIBC World Markets Inc. CIBC Wood Gundy is most appropriate for individuals with household investable assets of $250,000.

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