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May 28, 2019

Cannabis stocks luring retail investors away from other sectors

The overwhelming majority of respondents to a survey by KCSA Strategic Communications say they’ve made money on the cannabis boom, but the firm expresses caution for the future

A significant percentage of retail investors are pulling their money from existing investments to buy cannabis stocks, according to new research from KCSA Strategic Communications.

Exactly half of the 250 retail investors surveyed by KCSA say they have taken money out of other companies to invest in cannabis companies. Nine out of 10 investors in cannabis say that they have made money doing so.

Equity research on the pharmaceutical and recreational cannabis industries has suggested a potential combined value of between $100 bn and $146 bn. KCSA’s research shows that the retail investors surveyed are equally interested in investments in medical, recreational and Cannabidiol (CBD) cannabis companies.

The plant was decriminalized in Canada in October 2018, and investors have been able to capitalize on the growth of companies such as Canopy Growth Corp and Aurora Cannabis. It remains federally illegal in the US, but state regulations have softened in recent years, with residents in 10 states and the District of Columbia now allowed to possess recreational cannabis.

Speaking to IR Magazine last month, Mark Lakmaaker, vice president of investor relations at Aurora Cannabis, explained that the company’s market cap has grown from around C$60 mn to C$12 bn (from $45 mn to $9 bn) since he started working for the company in November 2017.

These are the kind of success stories that Todd Fromer, managing partner at KCSA, says are driving retail investors into cannabis stocks. ‘Cannabis is drawing the attention of the retail investor,’ Fromer tells IR Magazine. ‘It’s become pervasive in the media. CNBC is covering it on an almost daily basis, and it’s regularly covered in the New York Post and New York Daily News. You can walk into your grocery store in New York and see CBD products.’

Fromer cites Canopy Growth Corp’s planned $3.4 bn acquisition of Acreage Holdings as an example of the deals that are filling airtime and column inches in the financial press.

While many of the retail investors surveyed by KCSA were willing to withdraw from other stocks to invest in cannabis, there’s an enthusiasm to remain invested in cannabis for some time. Of the respondents that invest in cannabis, 80 percent plan to hold their investments for between one and 10 years.

‘Retail investors are very emotional and you have to look at their mindset,’ Fromer says. ‘Their stocks have done well and the market has done incredibly well. The last couple of years the index is up a couple of hundred percent.’

A note of caution

KCSA’s survey reveals that 40 percent of respondents own 10 or more cannabis companies. The same percentage say that cannabis accounts for more than a quarter of their overall portfolio.

The majority of retail investors surveyed (84 percent) are not concerned that the cannabis industry is not federally legal, a fact that prevents institutions from investing in any companies that handle cannabis.

‘That’s an insane metric,’ Fromer says. He adds that the lack of concern from retail investors ‘speaks a little bit to [their] acumen when it comes to dissecting real risk in their investments.’

‘I was around in 2000 when the dot-com bubble burst and it’s ironic how many similarities there are here,’ he says. ‘One of the things that keeps me up at night is how quickly this industry ignited and whether the valuations are sustainable.’

Ben Ashwell

Ben Ashwell was the editor at IR Magazine and Corporate Secretary , covering investor relations, governance, risk and compliance. Prior to this, he was the founder and editor of Executive Talent , the global quarterly magazine from the Association of...