The marijuana industry continues to reach new highs with legalization, in some shape or form, in 29 states and the District of Columbia. Plans are already underway to get cannabis proposals on the ballots in 2018 and 2020, and contingent on the outcome, medical marijuana or recreational marijuana could be legal in all 50 states – plus D.C. – in 2021.
While industry observers offer up varying forecasts for marijuana market growth in the future, they all concur that cannabis is a multibillion-dollar growth opportunity.
ArcView pins North American marijuana sales at $6.9 billion in 2016, up from 30% from 2015, and its researchers think the cannabis market could be worth $20 billion in 2020.
Matt Karnes, founder of GreenWave Advisors, thinks cannabis market sales could hit $25 billion in 2020, and $30 billion in 2021. If so, that would represent compounded annual growth of about 35% over the next five years.
This energy and optimism is causing a moth-to-flame reaction among investors, old and new alike, who are looking to profit from the pot stock market. Before diving in, however, investors should become well-versed with the market trends. Knee jerk or emotion-driven reactions to new regulations or legalizations may not be prudent. Keep in mind that there is no precedence for the cannabis industry, so many of the listed companies are learning as they go.
According to The Motley Fool, “Far more weed stocks than not with a market cap of at least $200 million have witnessed their valuations double, triple, or run even higher over the trailing 12 months.” This seems encouraging, but the reality is that most cannabis stocks are struggling with continued losses, and the ones that are on an upward trajectory may only be fueled by hopes and dreams.
“A good example would be Axim Biotechnologies (NASDAQOTH:AXIM), whose share price has risen by more than 3,500% in less than a year. Though the company now has Medical Marijuana, Inc. (NASDAQOTH:MJNA) in its corner — Medical Marijuana, Inc. took a 43% stake in Axim — it’s seemingly years away from having a chance at commercializing anything in its pipeline. In fact, most of its cannabinoid-based chewing gums, gels, and ophthalmic applications haven’t even begun basic phase 1 dose-finding trials yet. Investors are busy cawing over its deep pipeline and association with cannabis, but it’s yet to deliver much of anything in the way of clinical evidence that it’s worth anywhere near what investors are currently paying. That’s scary.” (Motley Fool)
- Focus on The Largest Companies in The Sector
The cannabis sector is loaded with micro- and nano-caps. These are companies with market capitalizations of less than $250 million and $50 million, respectively. On one hand, these young companies offer tremendous growth potential. But on the other hand, they are prone to bouts of extreme volatility. That volatility can be driven by unexpected fluctuations in sales and earnings growth. It’s also just a lot easier for big traders with billions to push around a $50 million stock. Focusing on the biggest companies in the cannabis sector helps moderate both issues.
- Go International
Some of the best opportunities in cannabis are happening outside the United States. For example, Canada is set to legalize recreational cannabis by next summer. Israel has legalized medical cannabis and is moving toward legalizing recreational. Australia voted to legalize medical marijuana in the fall of 2016. Local companies listed on these countries’ stock exchanges are scrambling to cash in.
It’s going to be difficult to separate winners from losers in the young cannabis industry. Some of these companies will grow into global leaders while others will fail and file for bankruptcy. This is the reason I recommend diversification. Owning a basket of marijuana stocks means that if one goes bust, your portfolio will survive.
- Core Versus Peripheral Holdings
Within a diversified portfolio, it’s a good idea to weight your holdings differently. Larger cannabis stocks should have a higher allocation while smaller, more speculative cannabis stocks should have a smaller allocation.
- Focus On The Long Run
The cannabis sector is prone to extreme bouts of volatility. For example, in early 2014, the entire sector rallied more than 200%. But for the next 18 months, the cannabis sector fell into a nasty bear market where some stocks fell more than 50%. You can’t worry about this volatility too much and let it distract you from the big picture. The real opportunities in cannabis will unfold over the long run.
- Don’t Sweat Valuation
Expectations for cannabis stocks are running high. Investors are very excited about this opportunity. That exuberance is on display in these companies’ valuations. Some of the most popular cannabis stocks have valuations that look absurd compared to the S&P 500. You’ll hear some voices bashing these valuations an unsustainable. While there is some merit to that, don’t let this criticism prevent you from seeing the big picture opportunity.
- Use Limit Orders
Buying cannabis stocks can be a lot different than buying a blue-chip such like Alphabet. Spreads in cannabis stocks can be much wider than blue-chips because of their smaller market caps and lower daily trading volumes. When buying or selling cannabis stocks, I recommend always using limit orders. This will help you avoid price slippage on your entry prices.
Barry Clark, Chief Executive Officer at FlowerKist, recently spoke with Forbes on the topic of cannabis and Wall Street, and suggests that new investors review stocks listed on the MJIC Marijuana Index for ideas.
Clark also recommends, upon finding a stock to invest in, choosing a stock trading site that doesn’t charge a lot of money per trade. Shop around for trade prices and buy in stages. “Only use 25% of your investment money for the first trade and see what happens before committing your entire amount,” he said.
Regardless of your strategy, be prepared to buckle up and hang on tight. Trying to grab a piece of this Green Rush is bound to be a wild ride.