Marijuana penny stocks have intrigued investors since the very early days of marijuana stocks hitting the market. After all, getting in at bargain prices on an industry set for rapid growth in the future seems like a healthy investment prospect.
With that in mind, Supreme Cannabis Company Inc (TSE:FIRE, OTCMKTS:SPRWF) shareholders are certainly smiling after the company’s recent deal with Canopy Growth Corp (NASDAQ:CGC). But what does this tell us about the pot penny stock market at large? And how can investors profit?
Marijuana industry powerhouse Canopy Growth recently announced that it’s set to acquire Supreme Cannabis Company Inc in a deal valued at $435.0 million. (Source: “Canopy Growth to Acquire The Supreme Cannabis Company,” Cision, April 8, 2021.)
The deal is largely being framed as a way for Canopy Growth Corp to expand its reach in Canada while also ramping up its production in anticipation of federal U.S. marijuana legalization (whenever that’s meant to happen).
Following the deal, the merged company is expected to establish a pro forma Canadian recreational pot market share of 13.6%. That includes an estimated 23.3% share of the premium marijuana flower segment in Ontario and a 21.4% share in British Columbia. (Source: Ibid.)
Canopy Growth Corp also hopes to benefit from cheaper, scalable cultivation via Supreme Cannabis Company Inc’s hybrid-greenhouse facility. Canopy Growth also estimates that the merger will result in about $30.0 million in cost synergies within two years.
So that’s the numbers side of things, but how did the stock market react to the announcement?
Chart courtesy of StockCharts.com
As you can see in the above chart (blue line for CGC stock), it looks like investors weren’t big fans of Canopy Growth Corp’s decision.
Well, for a few reasons (but I won’t get too in depth here; see this piece for a more exhaustive analysis of Canopy Growth stock).
The long and short of it is that the stock market isn’t hot on the Canadian marijuana industry right now (and hasn’t been for some time).
Investors are also a little worried that Canopy Growth Corp’s purchase of Supreme Cannabis Company Inc is premature, as U.S. marijuana legalization looks like it’s at least another four years away (though there’s an off chance that Joe Biden’s administration may move on legalization).
On the flip side, SPRWF stock has been going nuts. And that makes sense.
The reason investors get involved in marijuana penny stocks is precisely for the volatility. In general, penny stocks have the ability to rise far faster than the more established, higher-priced stocks, but they also have the potential to drop far faster than the higher-priced stocks (although that isn’t always the case).
I’ve never been a fan of pot penny stocks. I’ve seen way too many fly-by-night operations try to cash in on the interest in pot stocks, only to see them collapse in spectacular fashion, leaving many investors hurting.
By contrast, more established marijuana stocks that I’ve written about over the years (like CGC stock) have experienced massive gains. Canopy Growth stock has seen gains upward of 200% since I began writing about it in 2016.
So I’ve been a fan of the buy-and-hold strategy.
But with the marijuana market stalled due to the political deadlock regarding U.S. marijuana legalization, for investors looking for short-term gains, marijuana penny stocks may be where the highest potential is.
Again, I want to stress two things: 1) this is a short-term prediction and exposes investors to high volatility (as in, it’s probably not best to put retirement savings in pot penny stocks), and 2) I believe that the bigger gains are coming down the line for more established pot stocks as we eventually see U.S. pot legalization.
After all, Canopy Growth Corp is about as well positioned as any company to profit from U.S. marijuana legalization when it eventually happens.
But the cannabis sector is in a bit of limbo as we await another major market legalization (whether it’s the U.S., Germany, or another country).
In the meantime, acquisitions of smaller pot companies represent some of the better short-term-gain opportunities as Canopy Growth Corp and other bigger players seek to consolidate the market and expand their services.
We actually experienced a similar period of acquisition fever in the lead-up to Canadian marijuana legalization. In that period, many marijuana penny stocks saw huge gains as smaller companies were gobbled up by larger ones.
The market isn’t as frothy as it was then, so we’re not likely to see as many acquisitions, but even in 2021, we’ve seen some major mergers and acquisitions that have supercharged stock gains.
Keeping an ear to the ground (and eyes on Profit Confidential) will help investors stay up to date on market news that could result in being able to invest in advance of an acquisition or merger, with the potential to see large gains.
Pot penny stocks are once again gaining widespread attention due to the possibility of more acquisitions and mergers. As seen in the recent Canopy Growth/Supreme Cannabis deal, the majority of the gains are likely to be felt by the smaller companies.
As such, purchasing shares in advance of a merger or acquisition can lead to pretty strong gains, especially in the context of a weaker market at the moment.
While I’m still a huge weed stock bull—the potential for gains is still massive and unique among industries right now—we’re likely to see some corrections if federal U.S. marijuana legalization is put off for another few years.
But just because we’re seeing a slowdown in the market from an investor perspective, it doesn’t mean marijuana companies won’t make deals that set themselves up for the future—the Canopy Growth Corp and Supreme Cannabis Company Inc merger being a perfect example.
For investors who aim to maximize their gains in the near term, looking at possible acquisition targets among marijuana penny stocks could be a strong tactic.
For investors who are seeking long-term gains, I still believe that the best chance to maximize investment dollars is through buy-and-hold strategies with the companies that are most able to take advantage of pot legalization around the globe.