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Cannabis stocks have reached the mainstream, and some of them are soaring on the New York Stock Exchange. Like any hot new sector, the cannabis industry can be confusing for an individual investor, and the risk of losing money is real. Can you safely invest in cannabis stocks today?
Cannabis company stocks have piqued the interest of the international mainstream, in large part due to Canada’s landmark legalization of cannabis. The hype is further boosted by consistent progress at a state level in the US, and high hopes for similar scenarios in many European nations. The consequent demand for medical, nutraceutical and recreational products will potentially drive big earnings for cannabis companies. The ones listed on stock exchanges will see the price of their stock go to the moon, making the smart stoners who bought those securities much richer and happier. Right? No, wrong.
Thanks to the due normalisation of the plant, huge growth across a few vertical markets is easily forecasted. Cannabis pharmaceuticals, adult use, beauty and healthcare, nutraceuticals, pain and sleep control, and likely some other sub-sectors will thrive in the legal cannabis global market. Even Big Pharma, Big Tobacco, and Big Beverage boys can’t hide their interest in this huge business. Yet this doesn’t mean there’s room for everyone. And first of all, it doesn’t mean cannabis stock prices will go any higher from where they are trading right now, despite any worldwide developments.
Just like many new industries entering the markets, the whole cannabis sector is subject to speculation and huge fluctuations in stock prices, at least until the sector finds a balance. This, of course, can take several years. The lesson learned with tech stocks in the late ‘90s is that even successful leaders of industry struggle to maintain the high stock price they reach when hype is at its max. In other words, Microsoft stock reached its height of 58 dollars at the end of 1999, while today it sits at $36, and it’s unlikely to fluctuate greatly in the future because Microsoft is not a “growth company” anymore. Microsoft and other companies from the tech industry boom are now global giants that keep rewarding their investors and stock traders, but if you bought any tech stock in 1999 and kept it in your portfolio, right now you wouldn’t be so happy about your investment.
So what about cannabis stocks? Well, a good example is Tilray, who entered the Nasdaq with a booming initial public offering that brought the stock to over 200 USD in September 2018, only to autumn to 100 USD at the end of November. Does this mean people discovered they sell crappy hemp? Not likely; but if you now have to sit and wait for the price of this stock to recover 100% of its actual value, then Tilray’s weed tastes awful to you.
As opposed, if you invested in the cannabis industry over the past couple of years, there's a good chance that you are making some money, since many cannabis stocks have grown in price over the last 3 years. The bottom line is, “timing is crucial”. And by the way, back to the Microsoft example, it’s good to know that if your mom or grandpa had invested one month’s wage in a tech company back in the ‘70s and sold their stocks in 2000, you probably wouldn’t need to work today. This is the power of being early birds in emerging markets.
The cannabis industry is very young. Early birds can have difficulty understanding the various business models, and financial information provided by businesses is not always straightforward and transparent. Cannabis stock prices are subject to huge fluctuations due to general market sentiment and the dynamics of worldwide cannabis reform. Furthermore, none of these cannabis companies are making profits right now, thus their stock price relies exclusively on forecasted earnings in a highly competitive market that has just started to be regulated.
While a few companies were already listed on secondary trading markets, in 2018 the first cannabis businesses were listed on the major American stock exchanges NYSE and Nasdaq. Cronos Group started trading on Nasdaq in February and Canopy Growth was listed on NYSE in May, followed by Tilray in June who entered the market as the first cannabis growing company raising capital via a Nasdaq listing. Since then, a bunch of new cannabis players have started crowding the main exchanges in New York and Toronto, and the less regulated OTC markets as well.
Many cannabis enthusiasts, or simply money enthusiasts, are throwing their bucks at cannabis stocks, fearing missing out on big gains. But most of these people do not have investing experience, or have taken the time to research each company’s financial and business information. Going over data and corporate documents is not easy, and most people don’t have complete access to this information. As a result, the average private investor places their bet on something they don’t know. This is not necessarily bad—just be aware of it.
Stock markets can be approached as a trader or as an investor, or maybe as something in-between. As long-term investments, cannabis stocks provide next to zero guarantees of returning the invested money; thus, they are a great place to put some money you really, but really, won’t ever need. On the other hand, a cannabis stock trader can have fun with these stocks, as much as with thousands of other financial assets made for trading.
Despite most cannabis stocks today being Canadian, the companies listed only on the Toronto Stock Exchange are not mentioned here because investing in the Canadian stock market might be complicated for an individual based in Europe. However, several Canadian companies are listed both on Toronto and New York exchanges. The stocks trading on OTC minor exchanges are not listed here either; their extreme volatility and low liquidity make them a very risky and, after all, inconvenient trade. Ok, it’s now time to take a look at the most-traded cannabis stocks and their business model.
Several pharma and biotech companies have started to work with natural and synthetic cannabinoids, resulting in fully developed products or candidates undergoing clinical trials. Here is a short selection of pharma companies that are fully involved in the development of drugs targeting the endocannabinoid system.
There are a number of services and product providers coming from outside the cannabis industry that have gotten on board since legalization gained traction. Most of these companies are considered hybrid plays since their business is not strictly focussed on the cannabis industry. But they would benefit a lot from strong growth in this sector. Plant nutrition, pest control, facility management, lighting systems, and hydroponics are some of these ancillary services and products.
It is safe to say that all major tobacco and beverage corporations have their plans to enter the cannabis market as soon as it looks proper. Tobacco corporations are experiencing a decline in their traditional business, and for sure they won’t miss this train. As an example, Altria (NYSE: MO) is the company that makes Marlboro cigarettes, among many others. After being interested in buying a minority stake in the Canadian cannabis company Aphria, the tobacco giant may want to buy cannabis company Cronos Group, even if at the moment the companies have not yet reached an agreement. These kinds of rumours usually generate big swings in cannabis stock prices, which can be traded for a profit, or a loss.
It will take a few years before the leaders and the fast growers really emerge in the stock markets. Today, it seems wise to focus on companies with at least an adequate capitalisation, without relying upon press releases or social media hype. Except for the drinks and tobacco giants, and a few others, most of the cannabis companies are in a startup phase, and they can show zero earnings.
Even in the most optimistic worldwide legalization scenario, it is unlikely all these companies will generate enough profit to justify their actual price/future earnings ratio. Yet, this shouldn’t prevent us from scoping out future leaders and placing a bet as a long-term investment. Likewise, an experienced trader might want to buy some cannabis stock on their upward momentum, aiming to sell after a few hours, days, or weeks for a quick gain on the market hype.
Finally, it is also possible to invest in ETFs like Horizons Marijuana Life Sciences Index and ETFMG Alternative Harvest. These are funds that contain selected cannabis stocks and can be bought or sold online just like any other security, avoiding the risk of being invested in a single, or in just a few, companies within the sector. Whatever financial tool you decide to use, we have to reiterate that investing and trading stocks is a rational task that requires a little knowledge. Buying a security driven by your heart is not a good way to try and make some money!