Pot Stocks Might Benefit From Economic Vulnerability
The alarm bells are sounding—sorry, have been sounding for years now—regarding a massive tech stock bubble the likes of which we haven’t seen since the Internet was a funky new fad in the late nineties.
If a tech stock bubble indeed exists right now, does that mean other stocks are in perilous danger? More specifically, are marijuana stocks vulnerable?
While it’s difficult to answer such questions in a single word, I’ll attempt it all the same: no. In my mind, marijuana stocks aren’t as susceptible as other investments if there’s a stock bubble.
The main reason is that the marijuana industry is looking more and more like one of the best investment opportunities available on the market, due to its separation from big tech.
Consider this: almost all the stocks that have been publicly celebrated for their immense growth in recent months are in the tech sector. Let’s do a quick rundown of a few of the highest gainers of the past 12 months:
- NVIDIA Corporation (NASDAQ:NVDA): Year-over-year gain of 56%
- Tesla Inc (NASDAQ:TSLA): Year-over-year gain of 85%
- Apple Inc (NASDAQ:AAPL): Year-over-year gain of 25%
- Netflix Inc (NASDAQ:NFLX): Year-over-year gain of 22%
- Facebook, Inc. (NASDAQ:FB): Year-over-year gain of 30%
And remember, dear reader, this doesn’t include the beginning of the COVID-19 pandemic (about March to August 2020), when tech stocks surged upward as the market panicked.
So what we have is a single industry that has shown massive share-price growth in a period of intense economic uncertainty—which, even before this run, already had many calling it overheated.
Now there’s another voice joining that chorus, and a reputable voice at that: Michael Burry.
Even if that name isn’t familiar to you, you’re likely familiar with the book and movie The Big Short, which featured Burry (portrayed by Christian Bale in the film). In other words, this guy has a history of calling out massive market missteps before others.
In a series of tweets, Burry called out the massive stock market rise, in which one recent research paper found that the market’s value rose by $5.00 for every dollar invested. (Source: “’Big Short’ Investor Michael Burry Sounds the Alarm on Stocks, Blasts the Fed, and Calls for a Big Tech Boycott,” Business Insider, September 20, 2021.)
“That 5:1 ratio will get much, much sillier in time,” said Burry. (Source: Ibid.)
He said the imbalance in the tech stock market is a “product of a paradigm” that could continue or be reversed. “It may go to 100:1. Or become -5:-1. But parabolas don’t resolve sideways,” said Burry.
In summary, Burry believes tech stocks are overcooked.
To be fair, he’s anti-tech, both morally and financially: “Boycott big tech,” wrote Burry in a now-deleted tweet. “For your health, and the health of others.” (Source: Ibid.)
So he’s not exactly unbiased. Still, Burry is a smart guy with a good history of getting things right.
While I’m not sold on the idea of there being a tech stock bubble right now, I’m not entirely convinced that there isn’t one either. I believe that the technologies being built right now—like artificial intelligence (AI)—have planet-moving potential, which could justify even the loftiest of stock valuations.
Having said that, if tech companies fail to deliver on their promises, that would spell calamity for them and the stock market at large.
But back to the point at hand: what does this all mean for marijuana stocks?
In my mind, even if there is a stock bubble on the horizon, pot stocks are safe for a number of reasons.
First, they offer a great growth opportunity while also being separated from the controversial tech market. So, while tech stocks may plummet, investors will seek out other high-yield stocks, and marijuana stocks are a great start.
Consider that shares of Innovative Industrial Properties Inc (NYSE:IIPR) rose by about 85% in the past year, keeping pace with even the best tech performers.
Chart courtesy of StockCharts.com
What’s more, Innovative Industrial Properties Inc is a marijuana real estate investment trust (REIT), which means its shareholders get dividends.
In the midst of some massive tech stock collapse, getting into marijuana-related real estate could be exactly what the (medical marijuana) doctor prescribed.
With IIPR stock showing no signs of slowing, I’d imagine that many investors who had been newly burned by tech stocks in this hypothetical situation would be happy to find a stable, growth-oriented stock.
Moreover, pot stocks have already proven to be rather resilient over the past 24 months.
The pandemic hit marijuana stocks hard, but they quickly bounced back as time went on and supply chain issues were sorted out.
Furthermore, people tend to turn to vice goods like alcohol and drugs during downturns. Therefore, a longer pandemic mixed with another recession would be a horrible thing, to be sure, but objectively speaking, it would be solid for pot sales (and pot stocks).
So in a way, marijuana stocks can serve as an unconventional hedge.
And then you have the fact that IIPR stock and other marijuana stocks generally have the ability to grow globally for years to come.
All this forms a perfect storm for the marijuana industry, potentially driving pot stock prices sky-high, even in the face of a massive tech stock meltdown.
Tech stock bubble or no, economic downturn or no, there’s a lot to appreciate about marijuana stocks at the moment.
Pot stocks have proven themselves to be resilient and able to generate large gains, even in the midst of a once-in-a-lifetime pandemic.
And whether you detest tech stocks, believe a market meltdown is imminent, or just want to diversify your investment portfolio, marijuana stocks present a great investment opportunity.