What You Need to Know About Marijuana Stocks

Marijuana StocksMarijuana Stocks Crash

Marijuana stocks are some of the hottest tickers available right now on the market (and no, that was not a pun). The industry is rising rapidly, and with legalization continuing at a steady—if at times slow—rate, there’s a lot of interest in weed stocks. But what if pot stocks aren’t all they’re cracked up to be? In other words, is there potential building for a marijuana stock collapse?

As with any industry that has experienced large amounts of both growth and hype, marijuana stock investments will inherently carry with them a level of risk. After all, many of these companies are young and have to establish a strong enough track record to justify their current valuations.

In other words, a lot of money is being shoveled into the marijuana industry based on little more than hype and future projections. While that at times can be a recipe for big gains if the companies are able to deliver, it can also lead to disaster if things don’t end up meeting the market’s expectations.

The thing is that there are a lot of factors at play right now when it comes to weed stocks, and as investors should know, these variables could have a big a impact on investments. So it is critically important that investors know what they’re getting into before they start putting all their money on marijuana stocks.

What Pot Stock Investors Can Learn from the Tech Industry

Marijuana stocks are in a unique situation that does not come along very often—a product with an already established consumer base is about to be available for the first time on the stock market.

The numbers that support the interest in marijuana stocks are also plentiful.

First, we know there’s a strong enough demand for a legalized version of the product (in this case, we’re looking at recreational marijuana and not medicinal).

Consider that a New Frontier Data report projects that both jobs and revenue from the marijuana industry are primed for strong growth in the next few years.

In 2016, the legal cannabis market was worth an estimated $7.2 billion. New Frontier Data projects a compound annual growth rate of 17%. Medical marijuana is also expected to reach $13.3 billion in 2020, up from $4.7 billion in 2016. Recreational marijuana will also see a rise in revenue, climbing from $2.6 billion to $11.2 billion by 2020. (Source: “The Cannabis Industry Annual Report,” New Frontier Data, 2017.)

The report also states that more jobs will be created by the marijuana industry (over 250,000 by 2020) than by utilities, manufacturing, and the government.

The combined potential for both massive revenue and job creation is going to be hard to pass up by legislators in the future, making the likelihood of legalized marijuana in more nations all the more plausible.

But big projections can only get you so far.

Much like the dotcom bust of the early 2000s, a great many internet companies rose and fell in quick succession because of exactly what weed stocks are experiencing now: unrestrained belief and worship of potential, as can be seen from their stock prices on the stock chart below.

CARA stock

Chart courtesy of StockCharts.com

And this brings us to an interesting parallel—and maybe a cautionary tale for investors.

The tech industry is full of companies that were sold on potential and simply never delivered.

The history of the stock market is littered with bad investments along these lines, where products that looked like surefire moneymakers ended up costing investors buckets of cash because the hype could never become reality.

Think about a company like Twitter Inc (NYSE:TWTR). The social media giant promised growth, growth, and more growth. Users would continue pouring in and the company would continue to justify its valuation by virtue of its perpetual appeal. Of course, perpetual appeal does not exist and the company failed to meet expectations. With that came a swift and deadly decline for the stock.

All told, TWTR stock is down nearly 60% since its IPO in late 2013.

So what does Twitter have in common with marijuana stocks? Well, it’s not exactly a major breakthrough to be warning investors just how much potential and hype can cloud an analyst’s vision. Twitter is just a very prominent and recent version of a story that has repeated itself time and again on the market.

A new company (or in the case of marijuana, a whole new industry) enters. Its potential is sky-high. Money begins pouring in. Projections show massive growth. More money. Companies begin to rise in value and begin to gain even more momentum. More money.

And then the rug gets pulled out from under the industry’s feet. These companies start failing to meet market projections, the numbers lower, shares fall further, the companies are no longer looked at as golden stocks but instead as assets that need to be done away with.

The whole process is swift and deadly for investors, and the marijuana industry is by no means immune to the potential pitfalls that have plagued companies and industries since the beginning of the stock market.

Best Marijuana Stocks to Watch

Now that we’ve covered the doom and gloom aspect of marijuana stocks, what are some ways that investors can insulate themselves and their investments from the dangers of over-hype?

One way is to make use of those good investing practices that are useful in any and all scenarios, not just ones involving weed stocks.

For instance, know the company. 

This cannot be stressed enough. When you know the ins and outs of a company and know why it will be able to make money and therefore justify its stock price, you’ve already won half the battle.

Remember that at the end of the day, marijuana stocks will have to sell their products against competitors in a market that is going to be hugely crowded in the coming years due to all the hype, growth potential, and money to be made. If the stock you pick can’t survive in that cutthroat environment, then when the first earnings report reflects that failure, those share values will plummet.

So find a company that has a clear competitive advantage or at the very least a business model that you can get behind. Pot stocks, for instance, are not all produced in the same manner. Some are grown in fields, others in greenhouses.

In that example, you have pros and cons for both methods. Greenhouses are more consistent but are limited in space. Open fields have more potential for higher yields than expected, but can also be affected by rising costs or a poor crop.

Bits of information like this will allow investors to stay ahead of the curb and avoid getting swindled by a stock that promises diamonds but delivers cubic zirconia.

How the News Affects Weed Stocks 

Another important thing to note about the marijuana industry is how reliant it is on the news.

Take, for instance, the massive upswing in stock value that occurred when the Canadian government set a date for the legalization of recreational marijuana.

Conversely, if U.S. President Donald Trump or his staff were to come out against marijuana, the stocks would tumble.

The fact is that the marijuana industry is heavily reliant on politics at the moment. Without the required legislation being passed through, the industry will remain shut out from its true potential. While most signs indicate many western nations edging towards legalization, politics can be as unpredictable as the market itself. With that in mind, don’t assume that just because the wind is blowing one direction at the moment, it won’t suddenly and violently shift in the opposite direction.

And there are many different signs to watch that can help establish the state of the marijuana industry. Vermont becoming the ninth state to legalize recreational marijuana was a huge win for the industry, but not only because the state has now officially opened up itself for business.

Vermont is unique in that it was the first state to enact legislation through its elected officials and not via a referendum. This is a huge step forward in the fight for legalized marijuana as it represents that politicians are now viewing it as a viable and tenable position to hold in the parts of the U.S., rather than handing what could be a politically damaging issue to the people.

Subtle but important shifts like this can speak volumes as to which way things are moving in the industry. Savvy pot stocks investors need to be following up on the news.

How to Invest in Marijuana Stocks 

Marijuana stocks are new, exciting, and making a lot of investors a lot of money. But the key to navigating the industry is to not lose your head or forget your investment best practices when you jump.

It’s enticing to believe all the numbers you read and be overtaken by the potential, but don’t be! Do your research, find companies that you trust and believe can outlast their competitors, and keep your eyes on the news.

These are simple enough strategies that will not only make sure you get the most of your marijuana stocks investments, but also how you can avoid losing your money to one of the most dangerous swindlers around: baseless hype.