Cannabis investors should steer clear of cultivation companies for the time being, says a leading investment adviser.
Alexej Pikovsky, of London firm Augmentum Partners, says there is 47 times more flower in inventory, or in the ground, than there are sales. Speaking at the Cannabis Investors Forum in London he went on to say that, “We have seen some 150 licenses approved in Portugal and there is going to be massive drop in flower prices – so, for investors it’s not really the place to be.”
He followed up these statements by pointing out that the next step in the value chain for cannabis production – the extraction phase – is well worthy of investment consideration.
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Investing Cheat Sheet
Mr Pikovsky said that for investors the cannabis industry can be either ‘ten times or zero’. To ensure a return is a ‘ten times’ an initial investment then due diligence is vital ,and this includes a number of factors.
Describing it as a ‘cheat sheet’ he said investors need to consider things such as the abilities of the management team, its strategy, its progress to date, risk exposure, location, the people, and then finally the valuation of the business and how attractive this amounts to as a proposition.
While cannabis stocks have taken a pounding – down 50% on average over the last six months – he believes there is long term value, but he went on to say Canadian stocks are still over priced in relation to those in the U.S. Patrick Birley, is CEO of junior London stock market the NEX Exchange; a platform which is home to a number of cannabis businesses.
Cannabis Catch 22
He explained that the cost of listing on the NEX is around £5,000 but additional costs including lawyers and accountants will greatly add to that. He spoke of the dilemma for cannabis companies wanting to access capital to support their growth, as many institutional investors, such as pension funds, are still wary of the sector due to their conservative investing approach and concerns over legality, such as the U.K.’s Proceeds of Crime Act.
He described it as something of a ‘Catch 22’ situation for those who need to access capital, over and above their initial investments, but went on to say there is a growing interest in the sector. There was a general consensus among panelists, in a discussion on investing and fund-raising, that the industry needs to have strong focus on ethics.
The industry ‘should make an effort to clearly demonstrate that its goal is to do some good in the world’, was the widely-shared view.
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Fully supportive of this, the bubble will burst and out of it will come a regulated safe market, I’ve spoken to several investment firms in and around the industry and most say that the US and Canadian companies are going to come down to earth with a bang.
Prices are silly at present and the values can never ever be realised or for that case dividends released. We as the CTA are also cautious that quite a few (on the face of it) legitimate firms will simply disappear leaving the investors out in the cold with no hope of ever getting their money back.
This is not good for the industry and will return cannabis back to a “dodgy investment” scenario.