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Portfolio manager's advice for new marijuana investors and Top 3 stock picks

Workers produce medical marijuana at Canopy Growth Corporation's Tweed facility in Smiths Falls, Ont., on February 12, 2018. The Trudeau government is moving to ensure the Senate doesn't hold up its plans to legalize recreational marijuana in July. The government's representative in the upper house, Sen. Peter Harder, wants second reading debate on Bill C-45 wrapped up by March 1, after which it would go to committee for detailed examination. THE CANADIAN PRESS/Sean Kilpatrick

With the introduction of the Tax-Free Savings Account and the emergence of the exciting yet volatile marijuana sector, it’s hard to remember a time when more everyday people were dipping their toes into the stock market. But the marijuana sector can be a difficult one to navigate, especially for relative newcomers who are putting their money on the line without the steely nerves and savvy of veteran investors. CityNews spoke with Purpose Investments portfolio manager Greg Taylor, who helped make sense of the wild swings and opportunities that mark the sector. He also gave us his top 3 marijuana stock picks (below).

Q: What advice would you give people who are relatively inexperienced investors before they enter the marijuana sector?

A: I think everyone just has to realize there is a lot of risk in this space. There’s a lot of hype around the space. A lot of people are throwing money at it, but not everyone is going to win. Right now there’s over 100 licenced companies in Canada, and really at the end of the day I don’t think 100 are going to be there five years from now. So when you’re making investments, really look at the long-term horizon because not all of these companies are going to win.

Q: How do you separate the winners from the losers?

A: What I’m looking for is low cost. I think everything has to be low cost because weed is going to commoditize really fast. There’s so much capacity coming on right now and everyone is talking about $8 a gram, but you look at Washington state, it’s already sub $4. So I think to win you have to be low cost. You also have to be doing something different. I think oils and beverages are going to be really where the products are going to go in the next few years. And the third thing I’m looking for is international. I think the market caps of these companies is just too big for just the Canadian market alone. I think really to win you need to be having an international strategy.

Q: How can new investors handle volatility, and is there a way to de-risk the marijuana sector?

A: I think you have to be on top of it. This is not something you just want to buy and hold and not look at for three years because there is so much change and it’s a fast-moving sector. And certainly once recreational (marijuana) becomes legal in Canada in the middle of October, that’s going to change it because you’re going to have a lot of companies that actually have to go from a concept stage to an operating model. And I think that’s going to be a big game changer. The next six months are going to be really interesting. If you’re making investments I’d say make sure to watch them day to day, and if you can’t, look at buying one of the ETFs or funds.

Q: Does interest from alcohol companies or rumours that Coca-Cola wants to join the sector give it more validity?

A: Constellation, the maker of Corona, coming in and making a $5-billion investment in Canopy certainly got the space going. I think that just goes to show that where this is really going to win is beverages. If you’re not smoking now, nobody is really going to start smoking. There’s so many stigmas attached to smoking. I think as people want to get more involved in cannabis and try it out, the beverage side is going to be where people are going. People are already looking at Denver. Beer sales are down 10 per cent year over year. So all the big beer companies are focused on this … and that’s where I think the big beer companies and other consumer product companies are coming up to Canada to do some research to see if there’s any way to infuse THC or CBD into their products so they can take that to the next level.

Q: How can an investor know when it’s the right time to sell?

A: A lot of people have made a lot of money in a very short period of time. I would say if you made some money and you’ve had a fairly big win, I would take some money off the table so you know you’ve got at least your initial investment back …You really want to make sure you’re backing the winners in this. A lot of people are making the analogy to the dot-com craze. There was a lot of money to be made in the dot-com craze and we had Apples and Amazons and Googles come out of that. But there are a lot of companies that just went away. I think probably this is a good analogy. Ten years from now you’ll be looking a lot of these companies that just don’t exist.

Q: Is this a giant bubble — especially if weed prices drop significantly?

A: It’s really tough to tell because this space is really just starting … But overall … the valuations of some of these companies is really extreme if they can’t deliver. Now if the market does really come out as some expect and it can become a $50-billion market annually in another few years, then maybe some of these companies are fairly valued. But right now it you are looking companies that are just focused on Canada, I think they are probably getting on the higher end of the range.

Q: How important is branding going to be?

A: Branding I think is the biggest thing people need to watch. I think when you’re making the analogy to the beer industry and the tobacco industry, right now all of the cannabis companies — or the bulk of them that are listed on the Canadian market — are really just growers. And when you look at beer or tobacco, no one cares who grows the hops or grows the tobacco. That’s just the farmers. The real money is made in the brands and I think that’s where we need to figure out companies that can create brands that can be winners in Canada and can also be exported to be winners internationally. So I think companies that aren’t really focused on branding are going to just go away and just become farmers … Right now with the legislation, it’s going to be really tough to create a brand. So you’re looking at word of mouth … or partnering with an existing brand in beer  and try to make a crossover brand in cannabis.

Q: How can an investor stay calm during wild swings?

A: There’s going to be a lot of headlines in the next few months. Just really make sure you’re on top of your positions and if it’s really keeping you up at night, take some money off the table and make sure you got your initial investment out.

Disclaimer: CityNews does not offer financial advice and reminds investors to do their own research before investing.

Greg Taylor’s Top 3 marijuana stock picks: