Hedging
Cannabis pricing declines are rampant in every legal market as supply shortages get addressed by conformant participants. While many companies are working to mitigate the effects of this decline by addressing cost and yield optimization, others that use cannabis as a raw material are benefiting from this price decline.
Investors can adequately hedge their portfolios against price deterioration by seeking those companies with relative shelf price inelasticity that see margin benefit rather than revenue impact.
Diversification
Consolidation results from emerging markets moving from fragmentation towards oligopolistic structures, and this often has a negative impact on concentrated portfolios. Dynamic cannabis market eco-systems often defy rational market behavior as global regulations impact trade across the supply chain. While diversification is important to portfolio construction, the need for this basic Wall Street tenet is magnified in the cannabis industry.
It is important to be adequately diversified across sectors, geographies and legalities when investing in cannabis.
Granular supply chain margin analysis is an essential precursor to alpha generation. Tactical tilts help normalize portfolio margins while diversification serves as a hedge against unpredictable regulation.