Extracted Episode 5: Investing in Cannabis with Bruce Campbell
The ups and downs of the cannabis market are all over the financial news. As an investor, how do you navigate the green rush, the high valuations and a sea of companies making big promises? In our fifth episode of Extracted, finance expert Bruce Campbell stops by to help make sense of it all.
Bruce is the Founder and Portfolio Manager at StoneCastle Investment Management and the Chief Investment Officer of Cannabis Growth Opportunity Corporation (CGOC). He’s one of the top performers in the cannabis sector and is all about long term success. Bruce was kind enough to share his insights into the cannabis market, what he’s seeing today, where the market is going, and what key things investors should look out for.
The growing opportunity.
It’s no secret that Bruce sees a tremendous opportunity in the cannabis market. Bruce’s company has been integrating cannabis investments into mainstream portfolios for some time, and now offers a growth fund that is made up entirely of cannabis related companies. Along with the team at CGOC, Bruce believes that cannabis will be one of the strongest growth sectors over the next 10 years and beyond.
“We think (cannabis) is going to be probably one of the biggest opportunities of a generation as far as growth of a new investment sector.”
Perhaps more surprising than the growth itself is just how quickly this once black market product is making its way into legal markets. “It’s just one jurisdiction after the other,” Bruce says, “and it’s happening at a faster rate than we ever expected.”
Evaluating the valuations.
In a rapidly changing industry, it can be difficult to navigate cannabis companies’ fluctuating valuations. To complicate matters, Bruce says the lack of standardization in accounting and reporting make it challenging to compare numbers from one company to the next. “There’s still no apples to apples,” Bruce says, although he expects this will “get tightened up over time.” So for now, in the absence of clear numbers, what do portfolio managers like Bruce look for when evaluating cannabis companies?
“We haven’t seen real strong numbers yet, so you have to go off management,” Bruce says. He elaborates saying that when tracking an LP, they look for key measurables like what they’re producing, how much they’re producing, costs of production, sales, cost of sales and their selling price.
“We want to make sure the goal posts and the guidelines they’re giving us are actually achievable because that’s the biggest risk factor in the sector.”
Separating the standouts from the flameouts.
Bruce says there’s a lot that goes into predicting which cannabis companies will be successful. While many claim they have the best strains or the best delivery system, the big thing Bruce’s team looks for is a differentiation strategy. Furthermore, they look for companies that are backed by science and can provide data that proves that value of what they’re doing,
“Everyone tells us all these same stories but who can walk the walk?”
The next wave.
With the first wave of cannabis being centred around flower, Bruce is looking ahead to the potential of the extraction market as the second big wave. He acknowledges that people could be more open to derivatives than they are to flower. He draws a comparison to the way omega 3s and fish oils arrived on the scene and notes that CBD and other compounds could be on a similar path.
“When we get a little bit of science behind that and get to really extract those specific compounds, it’ll be in everything.”
Advice for investors.
If you’re a new investor getting into the sector, Bruce recommends taking a diversified approach to balance out the hits and misses. “Everyone would like to think that they can pick only the winners but the reality is that’s not investing, that’s called ‘winning’…we need to diversify.” His second piece of advice is to focus on execution quarter by quarter and making sure the companies you invest in are doing things to grow their business in the right direction.
Not sure where to start? StoneCastle’s Cannabis Growth Fund is a diversified fund that gives the smallest investor access to professional management.
The turning point.
Part of Bruce’s optimism about the cannabis market comes from the plant’s anecdotal history of helping humans for thousands of years. On a personal level, he has seen the impact cannabis has had on relatives and friends, and thinks it’s only a matter of time before people’s perceptions start to shift. We couldn’t agree more.
“20 years from now we’ll look back and say ‘what were we thinking?’ Why was cannabis illegal for a hundred years? Look what it’s doing for people now.”
For more on investing in Cannabis, listen to the full episode.