Cannabis Stocks: Ripe for Investment or Weeds to be Pulled?

By Robert S. Bacarella | August 19, 2019

The cannabis market is rapidly expanding and subject to enormous hype as cannabis is increasingly becoming legalized for recreational and medical use worldwide. There has been a “Green Rush” to invest in the sector as numerous companies have gone public with many stocks appreciating to near “bubble” valuation levels.

At this stage of cannabis industry growth, we believe that most investors should:

• Forget investing in penny cannabis stocks
• Forget investing in inexperienced management teams
• Forget looking for the needle in the haystack
• Avoid the sector entirely…but if not, then consider a diversified ETF

Two major investment concerns are the impact of federal legislation impacting profitability and the extent of a large “black market” that is selling products at cheaper prices than regulated dispensaries.

A commodity

Cannabis is a commodity, no different than wheat or corn. We all consume wheat but that doesn’t mean it’s a great growth market. The commoditization of cannabis could easily remove any novelty or brand-oriented premiums assumed for prices and profitability.

Most of the cannabis sector stocks have corrected between 25-50% from their recent highs as many investors locked in profits from extended valuations. The key to higher stock prices will be both state and federal legalization progress which will impact the demand of cannabis usage.

Due to the high risk profile of many of these investments, most investors should first consider investing in cannabis ETFs that will provide exposure to speculative stocks while mitigating risk through diversification. Two cannabis ETFs to consider are Horizon Marijuana Life Sciences ETF (HMLSF) or ETFMG Alternative Harvest Index (MJ).

If you’re drawn to the space, focus only on the leaders

The top industry leaders include Cronos Group Inc. (CRON), Canopy Growth Brands Inc. (CGC), Hexo (HEXO) and Green Growth Brands Inc. (GGBXF), a Jim Cramer favorite. An interesting investment in the space is KushCo Holdings (KSHB), the largest supplier of cannabis packaging that meets regulation requirements.

Are cannabis stocks a good buy right now? Generally, no. Most cannabis companies are generating revenues but still losing money. If you decide to invest in this sector, expect high volatility and be ready to cut losses. There are a lot of snakes in this grass so be careful if you’re watering any of these weeds.