There is something of a marijuana craze going on at present, with investors eager to jump into a booming industry. But there are a number of risks when investing in marijuana stocks that many people are unaware of. There is the obvious risk of the Federal government clamping down on what it views as an illegal drug, marijuana still being illegal at the Federal level. But there is also the fact that many marijuana companies are not actually profitable at present, with many taking huge hits. Small companies where a big return is possible can only be traded like penny stocks and are highly volatile with little trading history. There can be no actual trading history, given how new the market is. The alternative is to buy big stocks, as there are strict requirements for getting listed on an exchange which involves high annual turnover. The takeaway is that investing in marijuana stocks carries a big risk and it is not as simple as getting the chips in and making money. An upset in the industry or the price of marijuana could kill off many of these new companies.
The Best Marijuana Investment
Many had speculated that it would only be a matter of time before tobacco and alcohol started working with, acquiring and merging with marijuana companies, as they are all luxury substances that make people feel better and complement each other in many ways. And this has come to pass in a big way. Constellation Brands, the US distributor of Corona, Modelo, and Svedka Vodka, as well as the world’s leading wine company, recently announced that it would acquire a minority stake in Canopy Growth Corporation, a leading producer of medicinal cannabis products.Constellation paid $191 million for a 9.9% stake in Canopy, in addition to warrants that give it the opportunity to acquire an additional ownership interest.
Many suggest that with the help of Constellation Brands Canopy Growth can but succeed. The shares of Canopy Growth Corporation rocketed more than 200% higher in 2016, and they’ve doubled from their early 2017 lows. The company’s $1.7 billion market valuation dwarfs the company’s $37 million in trailing 12-month sales. Constellation Brands are a multibillion dollar outfit who know how to operate, and now have a dominant position in the US and Canadian markets, as well as being the first big marijuana alcohol merger. But it is not completely straightforward and there are a number of other considerations. Canada’s marijuana industry suffered a blow to its reputation earlier this year when products were recalled due to the use of banned pesticides in marijuana grow facilities. And there is uncertainty about the regulatory infrastructure in Canada, as many are speculating that the deadline of July the first 2018, upon which recreational marijuana is set to be legalized in Canada, will be pushed back. Many provinces in Canada are simply not ready for legalization and most likely will not make it.
And there are a large number of other considerations to take account of. Given the recent growth of Canopy Growth, can it grow further in its area, even with the backing of Constellation Brands? The whole industry is brand new and there is a large amount of regulations to be put in place in both Canada and the USA with regard to the advertising, marketing, sale, distribution and cultivation of marijuana. However, despite all the hurdles, it cannot be argued that this is one stock that is in prime position and is realistically as good as any other unless you have some information on a small up and coming company set to rocket. If the market keeps going up, then this mix of alcohol and marijuana is as good as it gets and there is no reason why it will fail compared to other companies without a proven track record, experience or finances to survive. It is a safer stock than many others and if it goes down, it is most likely due to an upset in the industry as opposed to a specific fault of the company itself.
A Risky Investment
Marijuana stocks in general are quite risky. As mentioned previously, the majority of them are not actually making any money and are waiting to turn profitable, which does not say much about a secure business model. In the old days, people would want a balance sheet with a 10-year history to analyze profit margins, dividends, turnover, price to equity ratio etc. Those days seem to be gone, as people want to invest in a stock with no record but in arising sector, and are eager to do so. Parallels may be drawn between what is happening in the cryptocurrency world, with many ICO’s crashing, though acquiring billions in funds on the basis of no more than a whitepaper outlining what it proposed to do. But Bitcoin, the main cryptocurrency with lots of backing, seems to be doing very well. The takeaway is to invest in large companies with proven track records where possible, as opposed to investing in penny stock up and coming marijuana companies which have no experience and no history. It is a recipe for disaster, and should something happen to the industry, such as a crash in the price of weed or a crackdown at the Federal level, many of these penny stocks have no reserves and will be wiped out.