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Canadian marijuana stocks may move higher on momentum as the Oct. 17, 2018 date for legalization approaches, but they need significant revenue growth to justify their huge market caps.
Share prices for many Canadian marijuana stocks have soared since mid-2016. The speculative appeal of marijuana stocks continues to attract investors looking for a “ground-floor opportunity.” However, the pioneers in an industry are not always the ones who survive.
Canadian marijuana stocks need more revenue growth
The barriers to entry are low for new competitors in Canadian marijuana stocks. If demand rises rapidly, tobacco companies and other big producers will likely enter the market.
Canadian marijuana stocks may move higher on momentum — but they need significant revenue growth to justify their huge market caps (the value of all shares outstanding).
A new crop of penny stocks are sprouting
Now that marijuana stocks have proven popular with investors and have given them big returns, investors looking to add to the aggressive portion of their portfolios may turn to the higher-risk strategy of buying speculative marijuana penny stocks.
However, there are several potential risks when investors venture into penny stocks in general.
Buying low-quality Canadian penny stocks is one of those things that can appear to be successful before it goes wrong. Some get hooked on it, since low-quality stocks can be highly profitable over short periods. That’s because they are generally more volatile than high-quality stocks.
Avoid ‘pot-of-gold’ stocks if you invest in Canadian marijuana
Penny stocks can attract investors with their low prices and promises of high returns when they pay off. Yet the odds against success are very high with these speculative stocks. And they can provide fertile ground for stock promotions and investing scams. Penny stocks can be more easily manipulated than most stocks because of thin trading and price volatility.
While the marijuana industry now has a number of established producers, in the early days of decriminalization (and again today) we saw many highly speculative “pot-of-gold” penny stock promotions.
A speculative stock is a higher-risk, more aggressive stock with uncertain prospects. Speculative stocks may offer significant returns to investors — but they will also have risk to match.
The odds are against you when you invest in speculative stocks and companies that are not yet making money. Some, if not many, of these companies will never make any money.
We haven’t found any Canadian marijuana penny stocks worth the investment
Investors are routinely asking about Canadian marijuana stocks, including pennies.
We advise staying out of stock promotions of Canadian marijuana stocks businesses or anything else. They attract the wrong kind of people. Stock promotion is a take-the-money-and-run type of business. Most successful entrepreneurs value their reputations, and want to build a profitable, sustainable business that can pay off for investors. So they generally go into some other line of work, and stay out of stock promotion.
These days, it’s faster and easier than ever to launch a stock promotion, thanks to the Internet. One recent “penny pot” investing stock scam almost seems like an MBA-style case study on how to launch one of these frauds online. To avoid being taken in, it pays to read more, and to think before you invest.
There’s only one way to profit from Canadian marijuana stocks
Which marijuana producers’ stocks will move up on speculative momentum, and which will crash? That’s very difficult to predict, given their sky-high market valuations in relation to sales, the industry’s low barriers to entry, and a nebulous future regulatory regime.
But what is certain is that overall marijuana demand and production will keep expanding rapidly. So we think a far better way to profit is with firms that will benefit no matter which producers thrive. They may include some producers of fertilizers or the infrastructure needed for greenhouse production. At the same time, they already have a solid base of other business, sound prospects, and the added appeal of a sustainable dividend.
The hype behind the legal marijuana industry is growing significantly. What’s your strategy for investing in this budding industry, or is it too speculative for you to get involved?
Have you found profits investing in Canadian marijuana stocks? What would you tell other investors to look for—or avoid?
Pat McKeough has been one of Canada’s most respected investment advisors for over three decades. He is the founder and senior editor of TSI Network and the founder of Successful Investor Wealth Management. He is also the author of several acclaimed investment books. This article was first published on June 3, 2018 and has been republished on the Hub with permission.
