3 Things You Need To Know About Pot Stock Investing
Marijuana stocks have not yet been meeting the lofty standards investors expected them to, but there is still enormous room for growth across the board.
It has not been the year of exponential growth that everyone expected from the cannabis industry, with several of the leading companies seeing little profit increase and raising of debts to fund expansions. Though increased legalization of marijuana has helped, there is still a long way to go for the industry.
Even though it has been a disappointing year so far, there is still massive potential in cannabis stocks, so we look at the three things investors need to know about the sector as a whole before investing.
1. The Bubble Will Burst
In fact, it is probably more accurate to say that the bubble HAS burst.
For the past couple of years, pot stocks have been in the green for investors, bringing in profits hard and fast. Although it is difficult to say when exactly an industry bubble will burst, there are some clear indicators. One such indicator is the overall decline in pot stocks across the board, including investors’ favorite Aurora Cannabis (NYSE: ACB), which has dropped to almost $3 per share from March highs of almost $10. Another victim of the drop is Tilray Inc (NASDAQ: TLRY), which is some 85% off its year-ago highs.
One thing for investors to be aware of is that this bubble is to be expected. It takes a long time for any industry to get its feet off the ground, and despite decades of black market trade, the marijuana industry is very young. There are supply chain issues, high state taxes, lack of federal legalization and all-round growing pains involved in the young industry's growth.
However, the industry will eventually mature and a stable system should begin to form, just as in any industry, so there is no need to worry just yet if the market is not exactly in Pot’s favor, which brings us to the next thing investors need to know.
2. It Is Not An Investment For Impatient People
Even with this dip in the market, pot stocks are still very much a promising long term investment. Though some enormous estimations from certain firms have been made – Stifel forecast $200 billion in cannabis spending over the next decade – most analysts estimate something relatively smaller, between $50-75 billion.
This estimate is still very much in play, as we saw above that there are still some kinks to work out in the sector, but once they are, the cannabis industry should see steady but consistent growth. The key to seeing any earnings is to be patient. Despite being nearly 40 years old, Apple (NASDAQ: AAPL) did not see its surge in growth until the early 2000’s onward.
We are certainly not comparing any cannabis companies to Apple, but the sentiment stands: buy and hold, and you are more likely to see returns.
3. It Is A Largely Leaderless Sector
Last but not least, it is important to know that right now, it is very difficult to pin down an industry leader for pot stocks moving forward. Sure, the same big names always crop up, namely Aurora, Canopy Growth (NYSE: CGC) or Aphria Inc (NYSE: APHA).
The reality is that many different experts will have many different ideas on who exactly will rule the roost when it comes to the young cannabis industry, but there is no real way of knowing this early on, so many people are likely to invest in losers. Sometimes the safest strategy is a diverse cannabis portfolio where the winners will outperform the losers, or invest in large companies with stakes in cannabis such as Constellation Brands (NYSE: STZ).
In the current consumer climate, where vaping has come under scrutiny and healthcare begins to look more and more into alternative medicines such as CBD oils, there is still plenty of opportunities for a big name in the industry to take the reigns and create a leading sector.
For now, however, it’s best to just kick back, be patient with your stocks, and see what happens!
MyWallSt operates a full disclosure policy. MyWallSt staff currently hold long positions in Aurora Cannabis, Canopy Growth, and Constellation Brands. Read our full disclosure policy here.