Have Cannabis investors forgotten the perils of the busted cryptocurrency boom? (Well, memory loss is a downside of marijuana use…)
With Canada’s recent legalization of recreational marijuana, many of us have mused about investing in the sector. Demand was already healthy, and companies are now free to incorporate it into their products. Estée Lauder has introduced a cannabis-infused facial mask, Constellation Brands (of Corona beer fame) took an ownership stake in a prominent Canadian grower, and consumer food and beverage brands are no doubt studying how to expand their existing product lines.
Bloomberg reported that -- at least as of mid-October -- cannabis stocks had outperformed gold, Bitcoin and the broader stock market. Simply put, the public suddenly developed a voracious appetite for the sector.
With this backdrop, investors could be forgiven for thinking cannabis companies are a lucrative yet low-risk bet. Food firms, for example, are considered “defensive” stocks, because of steady demand -- everyone has to eat. But even if licensed pot production grows like weed, stock prices may not. Consider this snapshot of the past few months’ stock performance for several marijuana growers.
Watched Pot Stocks Did Boil … Then Recoiled
Pot stocks’ fluctuations might have some investors reaching for Gravol -- or CBD from their preferred providers -- to ease their motion sickness!
This sort of volatility isn’t unusual. Exciting new industries, precisely because they’re exciting, tend to create investment bubbles, and the cannabis sector is no different. The same thing happened in the late 1990s during the dot-com bubble. Pot’s post-script may even be similar, with a handful of strong survivors standing after many promising startups’ adventures will have ended. This isn’t a recent thing, either -- as Elon Musk is fond of noting, Ford and Tesla are the only two American car companies not to go bankrupt yet. At the dawn of the automotive era, there were hundreds, if not thousands!
That’s not to say there isn’t money to be made in cannabis; there is. The lesson may be that investing in specific companies can be risky, even if they’re the current leaders in a transformative industry. Those who appear invincible today may be vulnerable tomorrow.
While some people seem to have an eerie ability to pick winners in a crowded industry, it’s a rare skill. For those of us blessed with less lucrative talents, there are other strategies that can be used to participate in new markets. Some investors choose a so-called “pick and shovel” approach, investing in companies who supply the equipment the industry uses. In this case that could look like investing in companies who sell cannabis growing or processing or purifying equipment. It’s a strategy of diversification, as the supplier is set up to prosper as long as the industry grows. Suppliers are also generally lower-profile than consumer brands, meaning their stocks are generally less prone to wild fluctuations.
Real assets: an alternative to “picking winners”
This brings us to a second type of green investing. Renewable energy is also a transformative industry -- hopefully, transformative enough to eventually turn the clock back on climate change.
Companies like CoPower help individuals participate in this energy transition, but without the trickiness of trying to predict future winners and losers. In this case, the strategy used to avoid public market fluctuations is investing in real assets through Green Bonds. Investors aren’t going to benefit from the upside of a single winning stock, but they’re not exposed to the downside either.
Instead of trying to guess which individual wind turbine manufacturers, solar panel installers or retrofit companies will be the titans ten to twenty years from now, CoPower lends money to operational renewable energy projects (or those about to come online). Project revenues, earned from the sale of clean power, are used to repay the loan, and those loan payments, in turn, generate the revenues used to pay interest to bondholders. CoPower also invests in energy efficiency projects; here, the CoPower loan and Green Bondholders are repaid with interest from the borrower’s relatively predictable cost savings.
Best of all, these projects’ electricity production and cost savings accrue month after month, independent of the market and the economy. As CoPower has noted in earlier blogs, this is an advantage of uncorrelated investments. They’re boring in a good way, being unaffected by the roller coaster-like ride of investments fads and trends in the public markets. It’s important to note that this approach does come with its own risks, for example, as a private investment the bonds must be held to maturity and aren’t subject to the same reporting requirements as a publicly traded company.
Despite the progressive ethos underpinning the investments, I consider the strategy relatively conservative. It’s less a philosophy of growing investors’ capital like a weed, and more like, say, a sturdy bonsai -- not the tallest tree by any means, but a sturdy one that doesn’t get uprooted by changing market conditions.
Editor's note: Matthew invested in CoPower's second issuance of Green Bonds (Green Bond II). CoPower Green Bond III is now available. This blog was commissioned by CoPower and may not be representative of the views of other investors or potential investors in CoPower Green Bonds. Please consult the Offering Memorandum of CoPower Finance Inc. dated May 11, 2018 for all material information in respect of CoPower Finance Inc., the third issuance of CoPower Green Bonds and the terms of the offering of the third issuance of CoPower Green Bonds.