As most market observers have noted Canadian cannabis producer Tilray, is in the midst of a wild ride. After debuting at $17 in July, shares zipped past the $200 mark at one point in September, making the five-year-old company more valuable than CBS and American Airlines. Tilray has since retreated, but it’s still plagued by wild bouts of volatility, routinely experiencing double-digit, single-session swings.
There are a few simple reasons for this. Because there are only a few publicly traded cannabis companies in the U.S., direct marijuana investments are limited. Making matters worse is that the company released a relatively small number of shares during its IPO. Also, with Canada set to legalize cannabis nationwide next week, it has set off a frenzy of interest among investors.
Combined, these factors have led to speculation and made the stock prone to wild price swings. As a result, some have compared Tilray and other companies like it to the fever that engulfed Bitcoin near the end of last year, when the price flirted with $20,000 before plummeting more than 60% in a matter of weeks.
After all, both segments are mysterious and deeply misunderstood, and because some got badly burned by the Bitcoin bubble, the conventional wisdom in some circles is that the same will happen to marijuana investors. However, when you take a closer look, it starts to become clear that Bitcoin and cannabis stocks have very little in common.
The biggest difference is that the demand for Bitcoin is hypervariable, clouded by the fact that it’s not entirely clear whether it will ever become an accepted medium of exchange. For this reason, it’s realistic to think that Bitcoin could act as a safe haven during times of broader market unrest, but otherwise have a difficult time gaining broader acceptance – which, in part, is why it crashed.
Marijuana, by contrast, has an established and robust market. As of 2015, an estimated 9.5% of adults used marijuana, almost double the rate of a decade before. That number is likely even higher today given the shifting legal landscape and softening public opinion.
In all, the legal marijuana market in the U.S. is expected to near $150 billion by 2025, according to one study. But even that could be underselling the potential upside, since there is a burgeoning segment of the market that even some experts didn’t fully appreciate only a short time ago: cannabidiols (CBDs), a non-psychoactive component of hemp and marijuana plants that is increasingly being infused into drinks, as well as therapeutic oils and lotions.
So, when you think about the volatility that has beset Tilray in recent months, don’t consider it a condemnation of the investment potential of the entire marijuana industry. Instead, it’s more of a reflection of the unique dynamics hovering over one company. Truthfully, Tilray is, at best, wildly overvalued and, at worst, highly manipulated, liable to take a huge dip as soon as the IPO lockup period expires and company insiders are able to unload their holdings.
That doesn’t mean there aren’t opportunities in this area. Cronos is a vertically integrated cannabis producer that has a healthy medical marijuana business. Based in Canada, the company has soared this year.
Meanwhile, marijuana retailer MedMen has locations in 19 states, including a recent expansion in Illinois and Arizona, and just received an injection of $57 million in financing from a Toronto private equity firm. Its stores, sometimes dubbed the Apple Store of weed because of their minimalist feel, are based in some of the hottest cannabis markets in the U.S., including Florida, New York and Nevada.
Also, consider Constellation Brands, the largest beer importer in the world, which last month plunged $4 billion into Canopy Growth, a medical marijuana company, in an attempt to gain an advantage in the cannabis-infused drink market. Aurora Cannabis, meanwhile, is another interesting alternative, having made a series of investments across the broader cannabis market, so much so that some call it the Berkshire Hathaway of pot. The fast-growing company filed an application late last week to list on the New York Stock Exchange.
Still, this sector of the market is both very young and increasingly volatile, and while all of the above companies have huge growth potential, not each one will prosper. The rewards could be high, but so are the risks, making pot perhaps the ultimate caveat emptor investment opportunity that exists today.
Ross Gerber is CEO and president of Santa Monica, Calif-based Gerber Kawasaki Inc., a SEC-registered investment advisor with approximately $840 million in assets under management as of 9/30/18. Gerber Kawasaki clients, firm and employees own positions in Cronos, Tilray, Aurora Cannabis, Constellation Brands, Canopy Growth Corp. and MedMen. Please seek guidance from an investment advisor before making any investment. All investments involve risk and may not be suitable for your situation.