One of the major shifts in the focus of the marijuana industry right now is from growth to profits. I’ve written about this dilemma for a while now.
On the one hand, you have marijuana companies that are keenly aware of just how massive the pot industry is going to be, wanting to develop strong foundations now. On the other hand, you have companies that need to satisfy their shareholders and board members, which means increasing profits, which in turn will drive share prices upward.
Right now, we’re seeing many companies zero in on profit-making, which could, in the short term, hugely benefit marijuana investors.
The classic challenge that every industry faces is the constant push and pull between profits and growth. This problem is especially present in the tech industry, and for the past year or so, it has also been a staple of the pot sector.
You see, when Canada legalized weed, many anticipated huge profits right out of the gate. The thing is, those expectations were always going to fall short.
In every legal marijuana market on Earth, there still exists a very healthy black market. It’s simply the nature of the beast that we have yet to find a way to legalize marijuana while simultaneously ridding ourselves of the entrenched black market.
To this day, that black market siphons billions of dollars away from licensed marijuana companies.
That’s a short-term problem, mind you. I firmly believe that, as time goes on, the legal pot sector will triumph over the black market, and that those billions of dollars will eventually end up in the bank accounts of legal marijuana companies.
That would send share prices soaring, but that’s a topic for a different time. What’s important for now is that the profits aren’t coming in at the rate that some had hoped.
Now, instead of understanding that this is a long-term process and that billions more in profit will be made over time as the black market is crippled and legalization grows around the world, many companies are seeking to increase their profits today.
And that means cuts to expenses. We’re seeing cuts made at a number of larger marijuana companies.
Aurora Cannabis Inc (NYSE:ACB) recently shed 500 jobs and Supreme Cannabis Company Inc (OTCMKTS:SPRWF, TSE:FIRE) has cut about 15% of its workforce. Tilray Inc (NASDAQ:TLRY) is the latest to join the list of job cutters, with plans to lay off 10% of its workforce. (Source: “The Supreme Cannabis Company Cuts 15 Per Cent of Its Workforce,” CTV News, February 11, 2020.)
All these cuts are made with the same goal in mind: to accelerate profits. It’s a move that companies in other industries make all the time. We’re seeing it done en masse in the marijuana industry right now in order to help better align profits with investor and analyst expectations.
What this means is that, if successful, we could see some very profitable quarterly reports in the near future. In that regard, marijuana investors have a striking opportunity to see solid gains from marijuana stocks of companies that have been making cuts.
For those looking to make a quick buck from the pot industry, then, now could be as good a time as any to strike.
On the flip side, we have some marijuana companies that are not making cuts, and are instead focused on growth. In those pot stocks, there lies abundant opportunity as well.
Marijuana Stock Growth Over Time
Above I covered why the marijuana stocks of companies that are cutting their workforces could see immediate gains. But what about the other pot stocks? As for the companies that aren’t making cuts and instead are spending more on expansion, are they doomed to see their share prices fall?
Well, actually, no. In fact, I believe that these marijuana stocks, not the ones of companies making cuts, are the true opportunities in the marijuana industry.
Allow me to explain.
Yes, many marijuana companies are trying to increase profits in order to make short-term financial gains. This is being done, as I mentioned earlier, in an effort to satisfy boards and shareholders.
But this strategy is myopic. Which is to say that it’s sacrificing the future for the present.
As I also said earlier, the pot industry is bound to continue to grow for years to come. As the black market is clamped down on and new legal markets open up (not to mention new products like cannabis-infused beverages being developed), this industry will explode in value several times over in the coming years.
But it’s going to take patience. Yes, Canadian marijuana legalization was a great start, but it’s not the be all and end all of this industry. Not even close.
Federal U.S. marijuana legalization, for instance, will have a far greater impact on the future of the marijuana industry. Consider that California alone is a larger market than Canada, both population-wise and economically.
And that brings us to the opportunity for the long term: marijuana companies focused on growth. These are the companies that are continuing to spend on developing and expanding their operations around the globe.
There is a chance they may be penalized in the short term, this is true, but in the long term, when the huge profit explosions start, we’re going to see these pot stocks skyrocket.
In other words, the companies making cuts right now have the chance to grow their share prices by a few dozen percentages in the coming months. The companies growing their businesses, however, have the chance to see their marijuana stocks double, triple, or even quadruple in price in the coming years.
For marijuana investors, the right strategy depends on one’s investing goals. But at the end of the day, going long on the pot industry could be a potentially portfolio-altering move.
After all, federal U.S. marijuana legalization is extremely close to becoming a reality.
In a few months, we could have a pro-legalization president sitting in the White House. Following that, it’s only a matter of time before U.S. pot stocks begin flooding the market, leading to, you guessed it, share prices rising.
And throughout this entire process, existing legal cannabis markets, like Canada, will grow at a steady pace as the black market falters over time. Really, the marijuana industry is more geared toward a long-term rush. Investors who understand that could make a lot of money.
Every emergent industry faces a time when it has to stop talking about how great it can be and actually start showing how great it is.
Companies like Uber Technologies Inc (NYSE:UBER) know this problem all too well. Talks of eternal growth have stymied the company’s fortunes on the stock market precisely because investors want to see profits sooner rather than later.
The legal pot industry has hit a period in its life cycle where it’s, well, awkward. Consider this its adolescence, if you will.
On the one hand, it’s no longer a child and should begin to demonstrate how capable it is. On the other hand, it’s not done growing, and if it tries to do too much too soon, it will fail. We find the marijuana industry in a state between nascent and fully mature.
What that means for investors is that there are a variety of ways to play the market.
Companies that are making cuts are looking to speed along their maturation process. While that’s admirable in the short term, I believe they are mortgaging their future. Either way, there is immense opportunity to profit from companies that are aiming to boost their gains in the near term.
On the flip side, you have companies that are looking to grow along with the overall pot industry and see massive gains, but over a longer period.
There’s no right or wrong answer to this; instead it’s more a matter of what you want from your investments. What is certain, however, is that there is money to be made in marijuana stocks if you know where and when to invest.