There’s been a love-hate relationship between analysts and the marijuana industry. Many on Wall Street (and those trading professionally in stock exchanges around the world) have been at times ravenously bullish on weed stocks and at other times about as bearish as can be.
What gives? Marijuana stocks scare analysts for reasons I’ll enumerate below, but more importantly, analysts have been waking up to the potential of the pot market. And that means it’s primed with opportunity.
But first, we need to understand what made analysts so hesitant in the first place. Pot stocks have scared institutional investors since the day they started hitting the market.
For many institutional investors operating in the U.S., the primary reason was that the drug was—and remains—among the most heavily prohibited substances across the country, at least according to the Drug Enforcement Administration’s classification of cannabis as a Schedule I narcotic.
Highlighting the absurdity of marijuana being placed alongside meth is well-worn territory. Suffice to say, the U.S. federal government’s position on marijuana—enforced or not—has had many institutional investors spooked about whether a crackdown could occur, and about the limits that could be placed on the global pot trade in the near future.
Honestly, that’s a fair (if myopic) position to take.
Yes, things are uncertain legally when it comes to marijuana in the U.S., and to this day, weed stocks are being stifled by weak federal action. But we all know the endgame: cannabis will be legal one day in the U.S. (more than 100 million Americans already have access to legal pot). It’s just a matter of time.
Analysts understand this, but there are still a few things that have kept them bearish on the weed market at times.
Many analysts fear that marijuana stocks are overvalued and overhyped. That’s a fair assessment if you look at the current market value of pot stocks. But that’s also a silly way to valuate these stocks. After all, if they valued Tesla Inc (NASDAQ:TSLA) by the company’s current value (revenue, profit, assets, etc.), Tesla would get nowhere near the market cap it enjoys today.
The same is true for weed stocks. Their valuations aren’t based on the currently available legal pot markets, but rather on the markets that are set to open up all over the world.
Wall Street analysts do this all the time: they valuate a stock more on speculation than on hard numbers. The whole GameStop Corp. (NYSE:GME) controversy was over precisely that type of speculation, only it went the other way. Retail investors were fed up with seeing Wall Street radically devalue stocks well below their actual value.
So stocks being pumped up or down based on speculation is nothing new. The real issue that many analysts have with marijuana stocks is that they don’t like the investor base.
Pot stocks are some of the few securities that have penetrated the zeitgeist. They’re some of the few securities that people actually know about and understand. What does a marijuana company do? Well, it produces, distributes, and/or sells marijuana, of course! Simple.
Considering how many people have partaken in marijuana over the years (especially young people), it’s easy to understand and share their excitement. They know firsthand how large the market is; some of their friends were smoking pot through high school and college. Of course there’s money to be made.
And they haven’t been wrong. In fact, a nascent industry of this proportion opening up and growing before our very eyes is a once-in-a-lifetime opportunity in the stock market. So they naturally jumped in with both feet.
Some investors have made out with big gains, while others have seen their money disappear, depending on when they entered. But the animating principle behind all these bets is that weed stocks still have plenty of room to grow.
But Wall Street analysts don’t particularly like unruly, unpredictable markets like pot. They prefer markets that are far from the public eye, where they can basically operate their financial schemes without public scrutiny or a mass of retail investors derailing their plans.
While that may be a pessimistic, glib picture of Wall Street investors, have the past few decades not borne that out? See special purpose acquisition companies (SPACs), the 2008 housing collapse, oil market manipulation in the early 2010s, precious metals market manipulation, GameStop, the recent Bill Hwang investment scandal, etc.
In other words, they’re scared of how retail investors can be fickle and unpredictable (not that funds aren’t also that way, but they tend to move slower, or at least more deliberately).
Volatility is high with marijuana stocks, so for those looking for quick money rather than buy-and-hold investments, it can be a difficult playground.
But to the pot stock investors reading this, their fear is your gain. We’re already seeing more and more analysts support pot companies, and it’s only a matter of time before they see that they can’t stay out of the game much longer, lest they risk losing out on gains.
And that, dear reader, means retail investors are in a very powerful position right now, in advance of institutional money coming in. Pot investors could ride the wave of gains that will come when U.S. marijuana legalization hits.
Marijuana stocks have never had enthusiastic support from analysts, and that’s how it remains. But as time goes on, we’re seeing more and more analysts get over their fears and endorse pot stocks.
As the legal marijuana industry continues to grow, with new billion-dollar markets opening up (e.g., New York State), it’s difficult to not get excited about the future.
Weed stocks offer perhaps some of the best growth prospects for long-term, buy-and-hold investing. Better yet, it’s wide open for retail investors to profit from marijuana stocks, in advance of the big guys.