This week’s member Q&A focuses on how to handle volatile periods in the cannabis markets and considers a potential acquisition target…
Welcome to another edition of our member Q&A!
We had another busy week here at the Institute. We added another great cannabis pick to our Cannabis Investor’s Report model portfolio, released a brand-new IPO dossier for members of The Cannabis IPO Insider, and introduced D.R. Barton, Jr. as the newest member of our Advisory Board.
D.R. specializes in high-volatility plays, so it’s fitting that we received a couple of questions about the best investment strategies for market downturns.
Let’s dive right in…
Michael S. says: “I believe in a bright future for cannabis, but am concerned about the effect of a major stock market downturn. How do you see cannabis affected by a major stock market downturn, and how should we protect ourselves?”
Good question, Michael. It’s ironic, because I think that years from now cannabis will be one of those sectors that people prefer during market downturns because cannabis is pretty recession-proof, like other consumer staples. But right now, if the stock market has a major downturn, cannabis stocks will go down too. We learned that this past winter, when global stocks took a beating and many cannabis stocks got hurt even worse than that. We could be learning that right now, as world markets are declining because of trade troubles with China and cannabis stocks are declining with other stocks. There’s no getting around that, and there are few ways to protect yourself – bonds could be hurt in such a downturn, too, and of course cash still doesn’t pay anything.
But even if you can’t protect yourself from a downturn, you can be prepared for one. If you have the resources, I think you should always have some “dry powder” – some money to add to your account and buy more stocks if they get beaten up. And you should be mentally prepared, too. Remember, there are dozens of factors that can send a stock one way or another in the short term – earnings, news, management changes, and yes, even things which shouldn’t affect the stock, like Brexit or tariffs with China.
But in the long run, earnings control stock prices. Show me a company with rising earnings and I guarantee you it will eventually go up. And we already know what is going to happen to the cannabis market overall, so as long as we identify those companies that will succeed in the long run, we’ll be fine, and we’ll have welcomed the dips as good times to make those portfolio additions.
A member of The Cannabis IPO Insider wanted to know a little more about how to handle this strategy and what impacts it could have on the industry.
Kirk writes: “If patience is what I need to exhibit, when I have current losses with stocks I own, does it make sense to buy more shares now while the price is down? A common strategy is ‘cost averaging’ by purchasing more shares at a lower price to recover losses quicker when the stock recovers… or am I helping drive the prices up for others to recover some of their own losses due to my patient and optimistic outlook? Looking for some guidance on this as my gut says ‘trust Greg’ because overall my numbers look good based on reading your regular emails…. but I also have a dose of professional skepticism I’m doing battle with.”
Kirk, I can’t give individual investment advice, so I can’t tell you what you, specifically, should do.
But I can say that, generally, when shares are beaten up is when I like to buy stock the most – but only if the company is still doing what I thought it was doing when I first bought it. So just like Michael S. above, I think it’s always useful to have some dry powder so you can pull the trigger on a good stock when it gets beat up.
Unless you’re a very large investor indeed, I wouldn’t worry about driving up the price for others – even if you do, you’re buying looking at even greater returns in the future.
Speaking of what could move prices, another member is speculating about potential M&A activity.
Jamie B. asks: “Do you think Cresco Labs/Origin House will try to acquire Ionic Brands? Ionic just signed a distribution deal with Origin House and it seems like a potential fit.”
Well, Jamie, I don’t like to speculate about specific acquisitions, but I do know there will be a lot of acquisitions over the next several months, and that good companies will acquire each other.
Since Ionic (CSE: IONC, OTC: ZRRRF) and the merged entities of Cresco Labs (CSE: CL, OTC: CRLBF) and Origin House (CSE: OH, OTC: ORHOF) are both fine companies with a dedication to building strong brands, it’s certainly possible.
But I think Ionic wants to stay independent for now and execute its growth plan. Ionic’s deal with Origin House is a great example of the power of both brands and of distribution in the cannabis market. In some states Ionic will be big enough to self-distribute. Other states, like California, are so big that it makes sense to use a distributor. And in still other places, the state may not be that big, but it may still be useful to use a distributor for one reason or another.
Keep your questions coming! You’ve heard me say it before, but it’s our members’ dedication to and involvement with the Institute that sets this service above anything else out there. Drop a note in the comments below to join the conversation.
Executive Director, National Institute for Cannabis Investors
May 11 2019