Unless you’re a momentum trader looking for some quick upside, the legalization of edibles next month should be given a wide berth by long-term investors.
Instead, a low-risk, long-range position in a big player such as Canopy Growth (TSX:WEED)(NYSE:CGC) may seem the wisest option for newcomers looking to gain upside from the cannabis industry.
The rebooted cannabis space may be a bust
Take two of the main product types due to be legalized under what pundits have dubbed Cannabis 2.0: edibles and vaping products. The former will not be hitting shelves until the middle of December, Health Canada stated back in June, and even those will be limited to products that do not in any way appeal to minors. The latter, meanwhile, may be impacted from a new stance in the U.S. that has labeled vaping as a health risk.
It’s a sobering development, and one that could dampen shares in companies hoping to clean up in the vaping space. One of the biggest potential growth areas under Cannabis 2.0 is attracting scorn south of the border, as the Centers for Disease Control and Prevention issues a fairly damning e-cigarette warning. Both the CDC and the FDA have now moved to warn young people and pregnant women to cease use of any vaping products.
There’s also the argument that CBD — the non-high-producing hemp extract that’s proving popular in the U.S. — could wane in popularity. While it has its proponents, to be sure, more stringent testing of the drug remains to be carried out, and unfavourable lab results could take their toll on share prices.
The Food and Drug Administration in the U.S. has, for instance, found several well-known brands to contain different levels of the compound than advertised.
Are long positions in the bigger players a better bet?
Needless to say, the above developments are unlikely to boost Cannabis 2.0, which is also set to kick in during a time of extreme fear in the markets, while the U.S. CBD growth market could slow.
While other products, such as topicals, won’t face the same restraints as edibles, their potential sales seem unlikely to carry the movement singlehandedly. What’s left for cannabis investors seeking upside, then?
Stats for Canopy Growth are reassuring, with newcomers to the space finding that the stock is relatively good value for money, selling at around twice its book value. Meanwhile, the grower’s market share and diversified areas of operation make for as solid a play as any in this complex new industry. The stock is proving popular with investors this week, despite a distinctly subdued market, up a few percentage points.
The bottom line
After the fizzling dud that was the first round of legalization, will Cannabis 2.0 be just another marijuana bust? The short answer is that investors would probably be wise to stay away altogether, limiting their cannabis investments to long positions in big producers, such as Canopy Growth.
Production and profitability are key in this industry, and Canopy Growth has the former covered and is on track for the latter.
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Fool contributor Victoria Hetherington has no position in any of the stocks mentioned.