Is It Finally Time to Invest in Marijuana Stocks?

Brittany Lyte — Fri, 09 Jun 2017 08:30:08 +0000

Politics aside, there's a lot of green to be made in the burgeoning legal marijuana market. As more states move toward legalization, the potential to profit grows higher and higher. But in many cases, it's still just potential.

While the industry is worth watching for investment opportunities, there are also some very real downsides to investing in cannabis right now. Read on for our roundup of the pros and cons of investing in weed.

Cannabis industry growth is soaring

According to cannabis research group ArcView, legal marijuana sales in North America increased by 34 percent to $6.9 billion in 2016. A prediction from investment firm Cowen & Co. puts the U.S. market at $50 billion by 2026. More than half of all U.S. states have already legalized the use of medical marijuana, while eight states and counting have legalized recreational use for adults.

Another triumph is the story of cannabinoid group GW Pharmaceuticals, whose stock has skyrocketed nearly 1,300 percent in value in less than four years. What's more, a growing percentage of Americans are supportive of marijuana legalization. Public support for legal cannabis has grown to 60 percent, according to a 2016 poll by Gallup. All of this makes for fertile grounds for further cannabis industry growth.

Marijuana could become the next dot-com bubble

When it comes to cannabis stocks, Canada is leading the scene. Unburdened by the depth of opposition that recreational marijuana has raised from the U.S. Attorney General and many in the U.S. Republican party, Horizons Medical Marijuana Life Sciences ETF — one of the first cannabis ETFs in North America — started trading on the Toronto Stock Exchange in April, almost instantly becoming one of the month's most popular funds. Propelling the marijuana ETF toward further success is a rise in investor enthusiasm sparked by the legislation recently introduced by Prime Minister Justin Trudeau to legalize cannabis across Canada. (The plan is expected to pass.)

For a new fund, this level of accomplishment is rare. But experts caution that the marijuana market remains dicey. Canada's landmark marijuana ETF has 14 members, some of which include drug companies whose profits largely draw from sources outside marijuana research. Add to that a 0.75 percent management fee — higher than the norm. The bottom line is Canada's marijuana stocks are still largely speculative, so investors should be cautious.

Marijuana businesses are hampered by a cash-only economy

Marijuana businesses are completely shut out of traditional financial services, which means the industry is forced to operate in a cash-only environment. Banks and credit card companies have largely been unwilling to work with cannabis firms, even in states where marijuana use is legal, because federal law still prohibits them from taking marijuana money.

Whenever a business is forced to deal in cash, there are security risks that its stockholders inevitably have to shoulder. Working in a cash economy, for example, means that a business is more susceptible to robbery or employee theft. It's also a growth inhibitor.

Penny stocks still dominate the cannabis trade

Most marijuana stocks on the market are penny stocks. Translation: They're pretty much one big gamble. With a share price of $5 or less, these stocks are unpredictable, and getting accurate and timely financial stats about them can be difficult. Of course, even a penny stock can experience explosive gains. But at this point, experts say it's little more than a coin toss.

Despite impressive growth, most marijuana stocks are losing money

What do most marijuana stocks have in common? They are losing money. Just two cannabis companies in operation can claim a positive EBITDA (earnings before interest, taxes, depreciation, and amortization), which is an operating performance-focused metric commonly used by investors to guide their investment decisions.

Those companies are the Ontario-based Canopy Growth Corp. and Aphria. As for GW Pharmaceuticals and all the others? Shut out from traditional banking and tax deductions, they are operating in a completely experimental world where they're left to learn as they go.

Don't go chasing unicorns

Experts warn that some marijuana companies are little more than a sham. Without a sound business plan, they are roping investors in based on an idea rather than substance or experience to put that idea into action. Don't get roped in. Be skeptical and do your homework. If a company or investment opportunity appears too good to be true, it probably is.

Marijuana news websites that only praise a company, for example, might be getting paid to do so. "Check financial websites like Yahoo Finance to see if management is selling any of their shares," Barry Clark, CEO at cannabis company FlowerKist, recently told Forbes. "If they believe in the company, they won't be selling their shares."

This article is from Brittany Lyte of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

How to create a speculative bubble and profit

Xin Lu — Mon, 19 Jan 2009 21:39:43 +0000

Recently I read an enlightening story in the New York Times about the Pu'er tea bubble in Yunan, China. The burgundy fermented teas fetched prices of $150 a pound at the peak, but now sells for less than a tenth of those prices. I have actually been to one of those tea houses in Yunan, and I have also seen the rise and burst of the housing bubble in America. These experiences make me think that there is a certain formula to creating a speculative bubble out of anything, and here is what I have gathered.

1. Create a magical backstory for your product - In the tea houses of Yunan they told us the story of the accidental invention of Pu'er, and how it cures many diseases and also aids dieting. In America homeownership is touted as "The American Dream". Both of these products were given an emotional and almost mystical backstory that made people covet them. The magical backstory should make people believe that they will be improved in some manner by your product, and that owning your product is an ideal to strive for.

2. Market your product as an investment - After people start to buy your products, it is important to make people believe your product is a great investment. In the tea houses they told us that they buy antique teas back as if they were gold, and paid more for older teas. Thus they have a saying that Pu'er gets more valuable as it ages. It sounded a bit incredulous, but it was also attractive. In America, I have no idea how many times I have heard that a home is the best investment you can make. Once money is involved, the product also appeals to greed.

3. Pump and dump - If you have a bit of capital, a great way to inflate the bubble is by buying up a lot of the product being promoted and then selling it to new people caught up in the fervor. In Yunan wholesalers bought teas back at a markup of nearly 30% a year and then sold it again to new "investors". In America there was a frenzy of flipping homes by individuals and large corporations that bought up land. The same happened during the dot com bubble, when investors that bought into the high technology religion snapped up every related stock they could find and quickly drove up prices. The key is to dump all the inventory before the demand dries up, and that is the hardest thing to do.

A classic book about speculative bubbles is Extraordinary Popular Delusions and the Madness of Crowds written by Charles Mackay in 1841. It details the dangers of mob mentality in investing and other aspects of life. Indeed, it is very difficult for one person to blow up a gigantic speculative bubble. It took entire industries and various government efforts to inflate the asset bubbles we have seen in recent years. I have no doubt that we will see more asset bubbles in the future, as they are testaments to human nature. The key to surviving them and maybe make a profit is to keep your emotions in check, and do not be so greedy that you are left holding the bag. Of course, this is all easier said than done.

This article is from Xin Lu of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread: