Cannabis is now legal in Canada, but the haze surrounding its financial future is as thick as ever.
Two basic determinants of profit – supply and demand – are really just educated guesses as the legal market opens up.
But as millions in profits turn into billions in profits the dictates of diversification call for marijuana to be included in a well-rounded investment portfolio. Remember, the dual objective of diversification is to open up your portfolio to upside opportunity while limiting downside risk.
For long-term investors saving for retirement, pot producers remain a speculative investment. Measured on any scale, they come down to single companies with a single basic product. There is a place, however, for speculative investments in a diversified portfolio, provided the risk is balanced at the opposite end of the risk spectrum through blue chip dividend stocks and even fixed income.
Investors who are satisfied with limited upside exposure to cannabis, and want to lower downside risk, can invest in marijuana indirectly through large corporations with significant ownership stakes in pot suppliers. The best example is probably global alcohol distributor Constellation Brands Inc., the largest shareholder in Canopy Growth Corp., which could provide a wide distribution network for Canopy as more countries relax cannabis rules.
When it comes to sector investing, it is still unclear where cannabis falls, but judging by the most prominent partnerships, it seems to be a consumer staple. In addition the Constellation-Canopy connection, Molson Coors Brewing Co. has partnered with Hexo, Aphria Inc. and Aurora Cannabis Inc. have hooked up with Shoppers Drug Mart (owned by Loblaw), and Diageo Plc is said to be shopping for a pot partner.
All the consumer staple stocks mentioned above are diversified well beyond cannabis, have strong track records for turning profits and paying dividends.
If that’s still too much risk for your portfolio, consider a consumer staples exchange-traded fund (ETF) such as iShares Global Consumer Staples.
If you don’t mind exposure to one product but don’t want exposure to one company there are straight-up marijuana, ETFs including Horizons Marijuana Life Sciences.
Cannabis Canada is BNN Bloomberg’s in-depth series exploring the stunning formation of the entirely new – and controversial – Canadian recreational marijuana industry. Read more from the special series here and subscribe to our Cannabis Canada newsletter to have the latest marijuana news delivered directly to your inbox every day.