Picking stocks in the cannabis space can be a daunting task, but what once used to be a very ‘out there’ sector is now whetting the appetite of investors.
It all started in 2018, when Canada legalised recreational use, but the UK is becoming an increasingly fertile ground for the sector after the FCA allowed medicinal cannabis companies to list in London last September.
According to Kiran Sidhu, chief executive at CBD firm Halo Collective Inc (OTCMKTS:HCANF) (NEO: HALO), the best stocks have significant potential for revenues and underlying earnings (EBITDA) growth in North America, as well as the ability to scale market share in Europe and Africa.
When choosing a cannabis stock, investors should look at a combination of scale, unique and popular brands and technology, he said, to ensure a sustainable competitive advantage in the longer term.
“Just like you would look at the companies selling brand-name products when investigating stocks in other industries, look at a cannabis company's products to see if they are not only leaders but innovators in the industry,” Sidhu told Proactive.
“A cannabis company operating in numerous countries often indicates success, but it's important to ensure it's also following the varying regulations in each location.”
The management team depth and experience are also key, he added, because they need to react to the ever-evolving regulations within the industry.
Aside from his own venture, Sidhu said Canadian producers Canopy Growth Corp (TSE:WEED) and Aurora Cannabis Inc (TSE:ACB) fit the bill.
Back to London, investors can tap into the market with investment companies Love Hemp Group PLC (LON:LIFE)(OTCQB:WRHLF) and FastForward Innovations Ltd (LON:FFWD), Goodbody owner Sativa Wellness Group Inc (LON:SWEL) and CBD oils group Zoetic International PLC (LON:ZOE).
In the US, the hope is that the Democrats’ US election victory signals a brighter outlook.
“The election of President Biden has increased investor hope that more accommodating federal policy could be on its way,” analysts at Barclays commented.
“The growth of cannabis poses the threat of disrupting existing staples industries – in particular, alcoholic beverages and tobacco.” In Europe, meanwhile, 19 countries have legalised cannabis for medicinal purposes, while Luxembourg could be the first one to allow recreational use this year, which may prompt a wider change among its neighbours.