Warning: 3 Things All Cannabis Investors Should Be Aware of

The Horizons Marijuana Life Sciences Index ETF (TSX:HMMJ) offers investors great exposure to the cannabis industry while decreasing volatility.

| More on:
You Should Know This

Image source: Getty Images

The idea of high-return investments is intriguing to all investors. The cannabis sector is a perfect example. Fortunes have been made in the industry, but now that legalization has come and gone, are there any opportunities left in the space?

Horizons Marijuana Life Sciences Index ETF (TSX:HMMJ) is the ideal way for investors to gain exposure to the cannabis industry without taking on specific business and execution risk. The fund consists of all the top companies in the marijuana space and is just over two years old.

It is of fair size with a net asset value just under $1 billion. While the ETF will still be exposed to the industry risk, it’s a good option for investors, as it is more stable than owning some of the individual stocks. Before investing in the space, though, it is important to consider these three important factors.

Marijuana is a commodity

Although the industry may be recently legalized, it’s important to understand that in general it is a pretty mature industry. The black market has been serving the demand for years. Since legalization, it’s been reported that cannabis use has increased; however, the numbers are negligible. This suggests that the majority of demand comes from existing users.

Cannabis products are mostly commodities, as there is very little differentiation between products. Since most of the more frequent users are also existing users, these consumers are more likely to value price as their main concern.

Pricing issues

The main issue that is currently plaguing the industry is pricing. The legal cannabis industry has product-quality requirements the black market doesn’t have. This naturally increases costs in the legal industry. Additionally, issues with supply have also been pushing costs up. The national average suggests legal cannabis is almost 57% higher than black market cannabis.

Considering that most illegal prices haven’t changed, it is no wonder that existing consumers aren’t willing to pay an almost 60% markup for the same cannabis they were buying prior to legalization. This has been a continuous problem, as consumers seem to be very price sensitive.

Going forward, as evidenced by data out of numerous American states, as other problems sort themselves out and the legal industry evolves, prices will begin to decline. This will manifest even more competitiveness in the industry as producers fight to produce the lowest-cost products.

Supply and demand

The supply issue story has also been highly talked about. A lack of supply when cannabis was first legalized caused a lot of problems for the legal market. Ontario, for example, had to limit its number of retail stores to just 25 for the entire province. Quebec has had to change its store hours to only open four days a week. A private retailer in Newfoundland even had to close its doors because of the lack of supply.

Undersupply may seem like a relatively easy problem to fix. Producers have been ramping up production to meet this undersupply; however, the undersupply issue could soon switch to the problem of oversupply.

At the moment, the total output production of the top 13 licensed producers (LPs) totals around two million kg of cannabis each year. Currently, Health Canada estimates that demand for cannabis both recreational and medical is 926,000 kg a year. This implies that just the top 13 LPs growing at maximum capacity would produce more than two times estimated demand, and that doesn’t even account for black market supply.

The bottom line

Due to the highly competitive market and growing pains the legal industry is going through, an investment today in the cannabis space is not worth the risk to reward. Although, if investors are keen to gain some exposure to the industry, a small position in the ETF would be the best way to play it.

Stay hungry. Stay Foolish.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Daniel Da Costa has no position in any of the stocks mentioned.

More on Cannabis Stocks

Pot stocks are a riskier investment
Cannabis Stocks

Is the Worst Over for Canopy Growth Stock?

Down 99% from all-time highs Canopy Growth stock has burnt investor wealth and remains a high-risk investment.

Read more »

Pot stocks are a riskier investment
Cannabis Stocks

Steer Clear: This Stock Spells Trouble

A newly listed cannabis stock is outperforming in 2024 but investors should stay clear to avoid trouble and losses.

Read more »

Cannabis stocks have fallen.
Cannabis Stocks

2 Best Marijuana Stocks to Buy This Month

Marijuana stocks in the U.S. such as Green Thumb and Curaleaf can help you deliver outsized gains to investors in…

Read more »

A cannabis plant grows.
Cannabis Stocks

Can Aurora Cannabis Stock Recover in 2024?

Aurora Cannabis stock is down 99% from all-time highs but remains a high-risk bet, despite its cheap valuation.

Read more »

A person holds a small glass jar of marijuana.
Cannabis Stocks

The Best Cannabis Stock to Buy Right Now

This cannabis stock has jumped 30% in the last few months, with even more growth on the way – all…

Read more »

Cannabis grows at a commercial farm.
Cannabis Stocks

Down 99% From All-Time Highs, Is Canopy Growth Stock a Good Buy Right Now?

Canopy Growth stock is a high-risk investment due to its negative profit margins and challenging liquidity position.

Read more »

Marijuana plant and cannabis oil bottles isolated
Stocks for Beginners

Aurora Cannabis’ Reverse Stock Split: Is the Stock a Buy Today?

Cannabis stock Aurora (TSX:ACB) is consolidating shares once again, but what does this mean for investors?

Read more »

Medicinal research is conducted on cannabis.
Cannabis Stocks

Where Will Cannabis Stocks Be in 10 Years?

Cannabis stocks could see a huge shift upwards should marijuana be rescheduled in the U.S., but you can still buy…

Read more »