Are Marijuana Penny Stocks Still a Strong Play?

What to Expect From Marijuana Penny Stocks in 2021

There was a time when marijuana penny stocks were all the rage. They were, after all, among the best ways to see fast gains.

Penny stocks are known for their ability to make massive swings with even relatively minor market moves. In the marijuana industry, where seismic event has followed seismic event in the years following 2014, penny stocks have shot up exponentially.

The question now is: Do pot penny stocks still have the magic? In other words, do they still have the ability to provide huge gains in short periods?

The answer is yes, but with a caveat.


Where Are the Companies Based?

First, it very much depends on where the marijuana penny stocks are popping up.

In the U.S., the market is still wide open. While some marijuana companies have proven to be more dominant than others (many of which I’ve written about extensively), the fact is that so much of the market remains untapped.

Forget about states where marijuana remains illegal; even in states where the drug is legal, the market is relatively under-served due to restrictions on banking for marijuana companies and access to investment money from large institutions.

Remember that California is the largest legal marijuana market on Earth (even if technically it’s not legal federally, but I won’t get into that right now).

Suffice it to say that the California cannabis market is, for all intents and purposes, legal, and there are many opportunities for investors to profit from the growth in the state.

Having said that, as mentioned earlier, the lack of banking support for both holding cash and loaning money has made the legal pot market’s growth in California slower than it could be.

What’s more, much like in Canada, California continues to host a vibrant marijuana black market that eats into the revenue that would otherwise go to legal marijuana companies.

The pot black market will become more and more vulnerable as time goes on and consumers transition from buying products from illegal dealers to buying them from legal retailers. But as that transition takes place, the black market will continue to be a thorn in the side of legal marijuana companies.

This constrained market maturation process means that startup pot companies (and future pot penny stocks) have the ability to enter markets and surge.

What’s more, due to the lack of institutional investment money available to U.S. marijuana companies and the barring of Canadian pot companies from entering the U.S. market, we have a situation in which small U.S. pot companies have the chance to grow and thrive longer before they might be acquired.

An acquisition almost always benefits the investors holding shares of the acquired company. Holding shares of the company making the acquisition is more of a hit-and-miss matter.

But if the smaller companies are acquired before they have a chance to go public, retail investors will be shut out from the gains from the acquisition news. Only angel investors, venture capitalists, and other insiders will see the big returns from those deals.

Canada faces that problem, too. Even if an exciting new marijuana company were to emerge in Canada, many of the top competitors are so fat with cash that they would almost certainly attempt an acquisition, potentially before the new company has a chance to make an initial public offering (IPO).

On the flip side, there are established marijuana stocks that are much more likely to expand internationally and take advantage of new market opportunities.

Imagine if the U.S. were to federally legalize marijuana, followed almost immediately by Germany. Both countries have massive markets with huge opportunities for marijuana stock investors. Gaining exposure to both markets as much as possible could be a great play.

But marijuana penny stocks, while they’ll grow rapidly due to the excitement of the new markets being legalized, will almost certainly lack the infrastructure, expertise, and capital to aggressively expand internationally.

In that instance, larger pot stocks could easily outpace pot penny stocks if they’re able to take advantage of both market openings.

What Do the Companies Provide?

The second thing to consider about marijuana penny stocks is what the companies are offering.

Do they have a novel set of products? Are they targeting an under-served but lucrative demographic? Do they have methods of marijuana production that allow them to sell at much higher margins or at much lower prices compared to their competitors?

In other words, is there something that makes the new penny pot stocks unique?

There are many established players in the cannabis industry, so it’s getting harder and harder for individual marijuana stocks to stick out.

But if a pot company can accomplish this differentiation by introducing an innovation, it will likely become flush with cash. The marijuana sector, after all, is one of the most lucrative and untapped markets on Earth. An innovator in the pot market could be a huge investment opportunity.

Share Prices

That leads me to the most important question: do pot penny stocks have a higher price ceiling compared to established, higher-priced pot stocks?

The short answer is yes. Of course, it’s easier to go from $1.00 to $2.00 per share than from $100.00 to $200.00 (if the prices are pegged to market cap, as they almost always are, to some extent).

Furthermore, marijuana stocks with lower share prices are more enticing to retail investors. While there’s no difference between owning one share worth $100.00 and owning 100 shares worth $1.00 each, there’s a psychological aversion to owning fewer high-priced shares, compared to owning many more shares of a cheaper stock.

Analyst Take

The overall view from my perspective is that there are opportunities for both large-cap marijuana stocks and marijuana penny stocks.

Depending on a number of factors, both could see exponential growth in the coming years. Having a varied portfolio would be the best way to gain exposure to all aspects of the market, though it’s worth noting that pot penny stocks are among the most volatile holdings.