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The Kanabo share price: should I get involved or steer clear?

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The Kanabo Group (LSE:KNB) share price has performed exceptionally well in the first week of trading following the IPO last week. From an issue price of 6.5p, the shares closed last Friday at 31p. This reflects a gain of almost 400%. The first few weeks of a new stock trading on the LSE are usually volatile. Yet even by IPO standard, this was a big move. So what’s the story here, and should I look to buy?

The backstory on Kanabo

Kanabo manufactures CBD products, marijuana pods and inhalers, and other similar items. It says that all the cannabis and other drug-related products are purely for medicinal purposes and wellness. Although Kanabo shares are unlikely to be included in any ESG investors portfolio, it’s technically legal. Cannabis (for medical use) was legalised in the UK back in 2018. Regulators have also given the green light for these types of companies to list on the LSE.

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It thus became the first medical cannabis company to go public here in the UK. Given the Kanabo share price performance in the first week, I’d say it’s been a success so far. The company finds itself with a market capitalisation of around £112m. The funds raised from the IPO are going to be ploughed back into product development.

Could the Kanabo share price head higher?

Firstly, let’s look at the size of the market. There’s no question that the cannabis market is growing globally. More countries are legalising it, leading to forecasts that in Europe and the UK, the market could be worth £1.7bn over the next four years. Clearly, Kanabo is in a good position to reap the benefits of this growth. On the other hand, the market is still relatively new here in Britain. There’s no blueprint for Kanabo to follow.

As a company that’s just listed, it’s hard for me to find all the financial details to give me more insight. A private limited company doesn’t have to share as much financial info as a public one does. From what I can find, the business is loss-making. The latest loss after tax for the 2019 period was £360k. Without more detailed financial reporting, I can’t glean much aside from that. And investing in a company that has been losing money doesn’t seem a smart play.

Given the size of Kanabo, I think the share price could head higher as it could become a takeover target. A larger pharmaceutical company that sees the growth potential in this sector could look to buy it. Depending on the premium put on the Kanabo share price at that time, shareholders could see a large profit from buying now. But that’s not guaranteed, of course.

As I’ve flagged in recent IPO articles on Bumble and Moonpig, I’m not a fan of investing just after an IPO. This is the same risk with Kanabo. I’d much prefer to sit on the sidelines for a month and see where the share price settles before making a move. This reduces my chances of large losses during the volatile initial trading period.

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jonathansmith1 has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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