Is Cannabis the New Cryptocurrency for Investors?

my mouse in Southwick and I'm joined as always by Robert Brougham personal finance expert here it's motley fool hello Alison today we're gonna learn more about the growing cannabis industry and whether or not you should invest in it and if you are how should you invest in it or not I don't know we're gonna get help from David kretzmann all that and more on this week's episode of Motley Fool answers so bro what's up well soon as you know in this segment I usually choose one item from the news and talk about it for about five minutes but I read so much I have trouble narrowing it down so this time I wouldn't try something different I'm gonna highlight three things a little shorter time for each and one fun slash weird fact are you ready I'm ready number one defer your gains with qualified Opportunity Zones so this is a lesser-known creation of the tax cuts and Jobs Act passed at the end of last year basically if you sell an investment for a profit normally have to pay taxes on the capital gains but you can avoid that if within 180 days you invest in these qualified special opportunities owns its basically it was a way for Congress to try to get people to invest in lower income areas of the country it's so new that they haven't worked out all the details and just in July did the IRS actually designate which these what these special opportunity zones are but basically how it works is you sell one investment you invest it don't have to pay taxes on those capital gains you can defer them up to the year 2026 and if you keep holding for several years your cost basis goes up so your gain is actually shorter at least in terms of the taxable the the taxable gain you invest in a business or real estate in one of these lower income communities if you hold that for ten years when you sell if you have a gain you don't pay taxes on that game it's an extraordinary opportunity but they're just starting to work out the details so if you are interested in doing this learn a lot of the details one great recent article on it it can be found on kitsis com that's ki T CES com written by Jeff elite Jeffrey Levine it's called using qualified opportunities own funds to minimize capital gains so check that out number two Justin for the holidays get online prices at bricks and mortar stores and this is comes from Money Magazine article written by poor polish wrote titled ten big chain stores that will secretly match Amazon's low prices and essentially listed a bunch of stores where you can gum it go in and with your phone and say look here's the price on Amazon com will you give it to me and they will do it those ten stores are Bed Bath & Beyond Best Buy Fry's Home Depot JCPenney Nordstrom Lowe's Staples Target and of course jo-ann fabrics and I did some research and found some other stores will do this is to Dick's Sporting Goods Walmart will do it um so I thought that was actually kind of interesting I went and actually tried it at Best Buy when we were getting a gift for my daughter and it worked is that they're like a little way that you can scan barcodes into Amazon too so that would make it super easy to actually do the apples-to-apples comparison yes and that's a good point because each store has their own rules about this and some of the stores the rule is it has to be the exact item and it has to be sold directly by Amazon not by a third-party seller so that would be very handy but some stores like Home Depot's and JC Penney's it won't they won't only just match the price but they'll give you a five to ten percent discount on it so something to consider item number three and it's a sad one coming straight from Bloomberg here's the headline America's student loan debt crisis is about to get much worse so starts with he said stats straight from the article here federal student loans are the only type of consumer debt with continuous King cumulative growth since the Great Recession student loans have seen almost a hundred and fifty seven percent cumulative growth in the last 11 years compared to just fifty two percent for cars and actually overall mortgage and credit card debt has gone down when when you look two at delinquencies one in ten kids usually but one ten people with student loans are delinquents that means they haven't paid it in more than 90 days compared to just like 1 to 4 percent for mortgages and car loans and it's about to get worse because school is getting more expensive and interest rates are going up so it's like a double whammy on kids so the bottom line here is at this point there are kids all across the country one of my included who are applying to colleges and students of all ages are applying for financial aid now because the FAFSA opened on October 1st the FAFSA being the Free Application for Federal Student Aid people going to be making some big decisions about where they're going to school and it's going to affect their life at the five to ten to twenty years after that depending on how much student loan they take out so please please please do whatever you can to graduate without student loans could be looking harder for scholarships considering ROTC staying in-state going to Community College for a couple of years but whatever you do try to graduate with as little debt as possible and then finally the fun fact this comes from the new Bogle heads and investing podcast holded it's hosted by Rick ferry who's one of my all-time favorite investing writers the very first episode featured an interview with none other than John Bogle the founder of Vanguard and the father of the index bond they talked about the beginning of the index fund it turns out when they first launched the fund it was such a dud that they didn't collect enough money to buy all 500 stocks so they could only buy 275 so they tried to do like a sampling of all the sectors and industries within it and the first manager of the fund was a young woman who did it only on a part-time basis her other job was working in her husband's furniture store in Wilmington Delaware those inauspicious beginnings the Vanguard 500 as since ground to be the biggest mutual fund in the world Wow that was a fun fact here we are amidst reefer madness 2018 light it up about cannabis is it the new crypto for investors some of you are nodding your head right now some of you are shaking your head some of you were shrugging so joining us to understand is David kretzmann he's the head analyst digging into the growth possibilities of cannabis I know there's gonna be so many bad puns like that was actually unintentional that I wrote digging into the growth possibilities and I'm only reading it now just keep moving so yes David thank you for joining us thanks for having me great to be here so this is we're taping this many weeks in the future it turns out we're where we are right now in time they just legalized cannabis up in Canada yeah so you've been on the show before we could waste timing like David tell us more about yourself let's just get in touch okay I appreciate that bro so cannabis Canada what did they just do how did they legalize it yeah October 17th was a big day in Canada they became the largest country in the world to legalize adult use of recreational cannabis up until this point Canada had allowed medical cannabis so there was like a small fledgling medical cannabis industry but the country took a huge step on the 17th to legalize recreational cannabis on a national scale now some people might be asking well isn't it already legal in some places in the u.s. like you have California Washington Colorado and that's true but in the US and I'm sure we'll talk about this it's still federally illegal so that that's why Canada being such a major economy and country taking this step is just a huge milestone for the industry for a substance or a crop that's really been under prohibition for almost a century now that's what makes this such a big deal so if I understand correctly Canada the at the federal level actually gave a lot of control to the provinces over how they regulate cannabis is that correct yeah it's gonna be kind of different locally yes a nationwide it will be legal but each province kind of similar to the states here in the US they have ability to make their own laws like whether you're 18 or 19 and exactly how you'll be able to access cannabis some provinces are totally monopolizing retail so the government's will actually build and manage the stores that sell cannabis other provinces are taking more of a mix between privatized retail public retail so you're seeing kind of a grand experiment all across Canada so you do have at least that legal framework clearing up on a national scale and that lets these more local experience experiments take place on the province level and here in the US it seems like we're going in the direction of increased legalization what's your take yet at this point we have over 30 states that have legalized cannabis in some shape or form most states are starting with medical cannabis but now we have nine states that have also legalized recreational cannabis where whether it's medical or you're just doing an edible and just trying to get that high affect and one way or another you're able to access medical cannabis and the elephant in the room continues to be what exactly the federal government does because at this point the Drug Enforcement Administration still lists cannabis as a Schedule one substance and that goes back to the 1970s and essentially that means cannabis is treated as the most dangerous substance or among the most dangerous substances that's out there so cannabis is Schedule one compare that to some schedule to drugs like meth and cocaine and that just shows you now maybe maybe we can reprioritize that at some point just the the way things are going but yeah I think it's just a matter of when not if when the federal government decriminalizes cannabis even President Trump has said he would probably support a bill which is working its way through Congress now that would essentially take the federal government out of it and at least let the states make that call for themselves but there's clearly a tide shifting here with public opinion in the US where the majority of Americans regardless of where you fall politically most Americans favor the idea of at least decriminalizing cannabis most Americans favor medical cannabis and then you're seeing more Americans favoring even recreational cannabis and essentially letting people make that decision for themselves rather than keeping it illegal some of the estimates for growth in the industry and granted this is from the cannabis industry annual report so they might be a little skewed but they anticipate that by 2025 between recreational and medical use cannabis will become a twenty four billion dollar industry twice as much as wine and this is that just for the US or was that that's just the u.s. yeah yeah that's bonkers yeah it's a big industry and obviously at this point I think what's interesting about cannabis is there isn't really any direct comparison for an industry that's manifesting in this way obviously it's been an illicit or a black market for almost a century now but there's no direct comparisons for where cannabis stands today so at this point you have a lot of different projections and estimates as far as how big the opportunity could be people trying to figure out okay how big is the black market in cannabis what will the legal canada's market look like so all those projections at least suggest that it's a pretty substantial opportunity and then when you take into consideration the potential global opportunity as more countries legalize medical cannabis and then most likely recreational cannabis down the road that really should open up legal cannabis to an increasingly mainstream audience and become a bigger industry as a result so we're talking about investing in cannabis what what really are we talking about what kinds of companies cuz I don't imagine I'm just gonna go hand some money to it hippie standing out in the field in the middle that's the great way they're probably not encouraged yeah at this point Canada really is the the haven for a lot of these legal cannabis producers it's by far the most attractive market to raise capital because these companies can actually go public on the Toronto Stock Exchange or the TSX Venture Exchange for smaller companies so it's relatively easy to list your shares publicly access investors that way and the fact that cannabis is now legal on a national level means that the banks are suddenly supporting cannabis companies so you're able to get a loan from banks or even I have an account with a bank whereas in the u.s. because it's still criminalized on a federal level a lot of banks are kind of nervous to get involved in supporting any form of the cannabis industry in the u.s. even though it is legalized in some states so you're seeing Canada attract more and more attention investment entrepreneurship as a result you have companies really all along the value chain you have companies are looking to produce cannabis companies are looking to distribute cannabis and often time these companies are actually vertically integrated because there isn't unlike other crops right now there's not this excess supply of cannabis you can access so if you want to sell cannabis or sell a branded cannabis product you also need to grow the cannabis at this point but part of what's exciting here is that we are treading new territory so we'll finally see how this market unfolds over the next year and Beyond in Canada so yeah that gives you an idea of the landscape but right now there's probably over a hundred publicly traded cannabis companies up in Canada and yeah they're all across the spectrum as far as where their places in the industry so there's always a dumb way to invest in something and hopefully there is a not dumb foolish approach to investing in the potential growth of the cannabis industry what is your capital F foolish approach so first let's start with the things that you want to avoid I think first you have to recognize that there is a lot of speculation here there's a lot of frothiness and partly for good reason like this is a new opportunity I personally am increasingly convinced that this is the beginning of a large legitimate legal cannabis industry so I think there is reason to be excited but at the same time we have to tailor our expectations because the the shares of cannabis companies today they're not trading based on present-day fundamentals or a track record because most of these companies have only been able to be in existence legally for three to five years at most and now finally in Canada we have a national recreational market so there is an increasingly large opportunity there but the shares of these companies are being priced based on future expectations and hype so there's undoubtedly a lot of frothiness here like I'm sure people have seen tilray and the headlines it's a company that went public in July they're a Canadian producer but they went public directly on the Nasdaq gained a ton of attention I think their their IP OS was initially priced at about $20 a share went up to as high as $300 a share and as we tape this right now it's around 170 when this airs in a few weeks who knows where it could be at 300 or at 20 for all I know so there's clearly a lot of shorter-term speculation so it's capital F foolish investors we don't want to get caught up in that hype we want to take a long term business focused approach like we do with any other industry or company so that's what we're trying to do here at the fool with some of our cannabis investing services that we've launched so far this year but recognizing that this is still dominated by early-stage companies they're at a riskier stage in their life they don't have much of a track record so there will continue to be a lot of volatility and as a result since there isn't much in the way of a track record or present-day fundamentals a lot of what we have to do is look at the qualitative factors so get a sense for the leadership teams at these companies who's at the helm of the ship is there a healthy amount of insider ownership because we want to be sure that the individuals who are spearheading these companies if they don't have a whole lot of conviction or ownership in these companies why should we as investors then you also want to pay attention to the balance sheet so essentially how much cash does a company have in the bank because virtually none of these pure-play cannabis companies are actually making any money yet so they're unprofitable and as a result they're burning a lot of cash which isn't necessarily a bad thing because if you do agree that there is an opportunity here makes sense to invest in a production facility a processing facility investing in marketing and brand building but you want to be sure that the company has enough cash to support that so those are some of the factors that we look at and then we also want to I mean taking a long-term approach we want to be sure that we're finding companies that are positioning themselves to be a relevant player in the long term so we're not necessarily worried about where the share prices will be in a month or three months or even a year we're more interested in what what are the odds that this cannabis company will be a relevant and thriving player in the industry three plus years from now so trying to take that long-term approach is kind of the way that we're playing a different game than a lot of this speculation and short term is short termism that's dominating category right now so are there a couple specific company names or socks that you want to put out there and for any listeners that want to maybe consider and start looking into the industry sure so we've kind of distinguished between like within the the initial companies that we've recommended to people as by recommendations we have the pure place so these are companies that generate the majority of their revenue from cannabis and some shape or form and then we also have picks and shovels companies and picks and shovels companies we've identified as companies that have a strong underlying core business that isn't in cannabis but then the potential opportunity with cannabis is kind of an add-on or a cherry on top but it isn't that the main thesis behind buying the the company so starting with a picks and shovels company I think Constellation Brands is a company at some people be familiar with or if people have followed this space at all you might have seen them in the headlines this is a company behind Corona the beer and then a variety of other wine and spirits brands that they have in their portfolio they've been one of the the better performing alcohol alcoholic beverage companies really in in the past several years unlike some of the other bigger players last year they invested a smaller amount into canopy growth which is one of the larger cannabis producers in Canada and then in August consolation brands re-up that investment in a huge way they invested in additional four billion dollars into canopy growth taking 38% control of canopy four of the seven board seats so essentially canopy growth today is a cannabis offshoot of constellation brands and to put that number in perspective in the first half of 2018 every single cannabis company public and private around the world had raised four point three billion dollars that's a first half of this year so when the single day canopy growth essentially raised the same amount that every other company had raised so this just puts constellation and canopy growth on a whole other level compared to other companies so from a picks and shoveling GLE I like constellation brands because this is a company that pays a dividend that they generate increasing amount of free cash flow so it's a healthy business they have a strong core business but they're also making a fairly aggressive push into cannabis and they during the announcement of this investment they said that they expect the legal cannabis market on a global scale to hit 200 billion dollars by 2030 so they see this being a big opportunity and they're making a substantial bet on it so that would be the type of company that I start with it's a business that's easy understand you can sort of see where cannabis could complement constellation brands because they have a lot of experience building brands and distribution with a highly regulated product like alcoholic beverages and it makes sense that they could transfer that knowledge over to cannabis in the coming years and I like the fact that they're taking a long-term approach to this or not investing cannabis to juice their share prices or their share price in the short term they're very much thinking of this from a decades-long perspective and I think that's the right way that as foolish investors we should be thinking with pure-play companies these are obviously much riskier companies like like I said earlier a lot of these companies are burning cash they're unprofitable the valuations are likely going to be very lofty no matter which way you slice it but but one company that I do like that that's a pure play cannabis producer in Canada is a company called can trust that this is a company that's still valued at over a billion dollars their revenue over the past year is still pretty minimal but they've registered among the most medical cannabis patients in Canada compared to the other bigger producers and they trade at it even though their valuation does sound lofty like a billion dollars for a company that's generated about thirty million dollars in revenue over the past year that valuation is actually really attractive compared to canopy growth or tilray or aurora cannabis or some of these other bigger players so I'm not making the valuation argument necessarily but compared to some of these other bigger players I think it is a more attractive price they also have a partnership in place with breakthrough beverage which is one of the largest private companies in the US and that's a company that is one of the leading beverage distributors in North America so in the coming years potentially can't tres will be able to plug its cannabis products into that distribution network of breakthrough beverage it's a founder leg company they have a healthy balance sheet so again this is one where it would still be incredibly volatile but I like the approach the company is taking when I spoke to their president this summer he said you know in 18 months or so I hope that we're not in the business of growing cannabis because when you think about it no one cares about who grows the coffee for Starbucks or the tomatoes for Heinz people are really just interested in the end product so the long term vision for can't trust and also some of these other companies is really in building brands because at the end of the day when you're dealing with what could potentially become a commoditized crop like cannabis the the greatest value to be capture will be from the brands that can build that the companies that can build those brands that resonate within consumers so just as you see in Heiser bush or Budweiser with alcohol or Starbucks with coffee or Heinz with tomatoes I think you're gonna see in the coming years and decades some pretty powerful global brands be built in a similar way around cannabis and I like the approach that can trust is taking to get there there's certainly yeah it's not a slam dunk that they will but I do like the approach that they're taking so that's one that I look at is you know a promising pure-play company what if I just want an ETF there there are a few ETFs out there again limited track records there because there again there hasn't been much of a track record to have in this industry the one danger with the ETFs is that they're often highly concentrated in the bigger players and I would say that most if not all of the bigger players are trading at some frothy valuations potentially unsustainable levels so you still want to understand what you're buying I wouldn't blindly buy an ETF so first you'd want to see what what their concentration is in the top 10 holdings what those companies are and if you're comfortable with the idea of having the majority of that ETF be in some of those bigger players and so for me personally I like the idea if if you are looking to get exposure to this category start with a company like constellation brands a more established multinational company that is looking to make some investments in the category and then if nothing else the approach that we're taking here at the Motley Fool with our cannabis investing recommendation services is we're almost building our own ETF so recognizing that this is a type of industry given that it is at such an early stage there will be plenty of losers in the coming years you're gonna see some consolidation you'll see some companies that fail to gain traction and just won't be able to raise cash and they'll they'll go bust but the thesis that we have here is that there will be eventual long term winners in the category and that a majority of the gains will likely come from a small number of winners so almost approaching like a venture capitalist where you're making a series of small bets you recognize that probably at least half of those bets won't work out like the way you hope but there will be one or two big winners that more than make up for the losers so with an ETF you might be able to capture that but I think over the long term if you are interested in this space it makes a little more sense to build a diversified portfolio among a few of the players and and go with that approach but teach their own I would just tread carefully with the ETF approach if someone's interested in this how much of their portfolio do you think they should devote to these types of companies it should definitely be a small part of your overall portfolio obviously each person's circumstances and risk tolerance will be different I've personally invested in all 10 or eventually 13 of our recommendations by the time this podcast is released so I've invested my own money in the and the companies that we've recommended in this space to our members but I just started with about 5% of my overall portfolio and you know I'm young I am adding more money regularly to my investments so that's the type of risk that I can afford to take even though 20 or 30 or 40 percent swings and these stocks especially the pure plays isn't all that uncommon it's actually probably more than norm not rather than the exception so for someone who's in or near retirement or if they're not adding a lot of money to their investments you just want to take a step back and really be sure anything that you put into cannabis in to the cannabis stocks should be money that you certainly won't need in the next five years and shouldn't be a substantial part of your overall portfolio so I would say when in doubt start small there's no rush because the way that we're approaching is like this will be something that unfolds in the coming years and decades and there will certainly be a lot of peaks and valleys along the way we'll have a lot of hype like we had around October 17th and legalization day in Canada I'm sure if and when the the US federal government decriminalizes cannabis on a federal level that'll be a huge catalyst for for the industry but yeah when in doubt start small all right David thank you I should probably have a disclaimer as always the Motley Fool may have formal recommendations for or against the stocks we talked about don't buy and sell stocks based solely on what you heard on this show David we stick around for a little game of course alright so I think it's safe to say that Ben and Jerry's ice cream company feels a connection with weed names include Cherry Garcia named after the lead of the Grateful Dead they also have fish food another band that enjoys just getting together in a field and smoking weed and just hanging out hours and then of course the ice cream half baked so for today's quiz you guys have to guess is it a weed strain or a failed Ben and Jerry's ice cream flavor let's do it okay the first one is snoops dream hoof boy so that would you'd have to say it's most likely weed so I'm gonna say it's a trick question and I'm gonna say it's ice cream I'm gonna say it's I'm gonna say it's weed you know what weed has it all right next one super Lemon Haze that's wondering what the ice cream flavor it neither does anyone want an ice cream dominated by that much lemon oh man I love lemon ice cream all right so I'll go with weed yeah what's what's even better than lemon ice cream lemon weed I'll go with weed again it is indeed we all right the next one is au pair oh that's interesting mm-hmm I can't imagine well I'll go with ice cream yeah I like ice cream there that word and you know ice cream it is indeed a failed Ben & Jerry's ice cream flavor it was fresh pear ice cream with a hint of almond and a light fudge swirl but apparently fans did not like it shocker yeah the next flavour or Swede strain bread and ginger mmm what kind of ice cream would be like I'm gonna have this tweet on that one I'll say ice cream er there's some Fred and Ginger celebrities out there well yeah Fred Astaire and Ginger Rogers I see one showing your age there yeah I know totally clueless here that's alright Rick thinks it's weed you think it's i think i said weed we do I scream I scream you're right it's ice cream this flavor feeds your ginger ice cream with chocolate bowties alright the next one you have to guess sour tsunami hmm it sounds more ice creamy to me but what do I know you know nothing nothing I think I'm losing this I'll go with I'll go with weed strain I think it's a sorbet it is a weed strain I survived okay the last one is black and tan just cut this gracious say it's both there are so many street strains of weed it is hard to know but if it is a Ben & Jerry's flavour that Trump's weathered I'm gonna say weed yeah what else weed ice cream it is ice cream increased out ice-cream swirled with chocolate ice cream it sounded pretty good but then apparently there's some British history and Irish fans did not like it anyway no Alison did you bring samples of all these here we go first we're gonna start off with snoops dream that's right yeah I don't know no we have none of that here alright so uh yeah that's all I got for you David thank you so much for hanging out with us always a pleasure thanks so much not a lot of fun well that's the show it is edited toking Lee by Rick and all our emails hold on for Robert broken by Miles in Southwick stay foolish everybody you

4 thoughts on “Is Cannabis the New Cryptocurrency for Investors?”

  1. Legal market will be 5 times less than illegal market so probably lots of cash flow for a few companies that are growing it the phama way. How a crop is grown is especially important to people who smoke weed and trust me they do care about it. To say they don't is not realizing who your customers are.

    I think the organic market will do well with this one knowing my friends the "hippies" as you call them, love supporting organic so the only licenced organically certified company The Green Organic Dutchman will do very well. They will take a market share of around up to 25%. It is of course all speculation at this point and you are right in your assessment, but the company has all the attributes you mentioned in the video. It is the 5th largest with the best fundamentals excellent management and raised the most cash compared to the high flyers at ipo, but most important there should be no dept especially with a market crash around the corner. I am betting on them with 3$ a share. Don't really understand how people are missing this one. But they will catch on soon enough. Personally I like investing in companies that care.

  2. First. Speculative like cryptocurrency.  Also like cryptocurrency, marijuana use ain't going nowhere I believe. Now will it make people exceptionally wealthy, I don't think so. But cryptocurrency is definitely on track to reward folks who got in early like kings and queens. Time will tell for both.

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