One of the things you should occasionally think about as an investor in common stocks is the question of exactly what forces make stocks move, either up or down.
The simplest reason is an imbalance of supply and demand; if supply is insufficient to meet demand, as it often is in a brand new industry, prices rise. That’s one reason that marijuana stocks have been trending higher, overall, over the past few years.
And why is demand rising? It’s not because earnings are rising. Most of these companies have no earnings; they’re happy to keep investing the money that investors are throwing their way.
No, demand is rising because perceptions are changing, for the following four reasons.
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4 Reasons Marijuana Stocks are Soaring
- Canada has already legalized marijuana commerce (in October) and slowly but surely, state by state, the U.S. is moving to do the same.
- The top six Canadian marijuana producers saw revenues grow an average of 246% in the latest quarter from the same quarter the year before. That’s fast growth! And it increases the perception that there’s money to be made in the industry. Americans like to make money, and better the legal entrepreneurs than wanna-be El Chapos.
- Perceptions about the harm that marijuana does are shrinking—though there’s still a conservative segment of the population that rejects the drug: note the pro-marijuana TV commercial that was rejected by the Super Bowl.
- And perceptions about the good that marijuana (and CBD) can do (like replacing opioids) are growing, slowly but surely, as it becomes clear that legalization in nine U.S. states and Canada has led to no major problems, and has made a lot of people happier.
As a result, marijuana stocks are hot!
The sector is already up 31.5% this year despite a recent pullback, and the biggest, most popular stocks have done even better, largely because institutional investors are focusing on the biggest stocks, like Canopy (CGC) and Cronos (CRON), which have received major investments from, respectively, Constellation Brands (STZ) and Altria (MO).
The reason that institutional investors have focused on these stocks is obvious. They’re liquid, and the stamps of approval of Constellation and Altria are reassuring. In the long run, these companies are likely to succeed, and these institutions are likely in for the long run.
Plus, the lowest-risk decision on Wall Street has always been to follow the crowd; if you’re wrong, at least you’re in good company. So, it’s no surprise to see groupthink rule in this sector.
But the result of all this buying is that the valuations of these big players are now seriously out of whack with the rest of the sector. Thus, if you buy now, you risk losing half your money should a serious correction come along.
So if you want to invest in the marijuana sector—the fastest-growing industry in America—what should you buy?
I suggest focusing on the ignored, (relatively) less liquid, smaller marijuana stocks, both in the U.S. and Canada, and in the update I sent to my Cabot Marijuana Investor advisory readers last month, I mentioned a bunch that could be bought right here, or even better, on brief pullbacks.
Some of these are Canadian producers.
Some of these are U.S. multi-state operators.
And some of these are ancillary businesses that are actually legal nationwide in the U.S. but are benefitting from the booming marijuana industry.
3 Marijuana Stocks to Buy
One, for example, is actually a REIT (real estate investment trust) dedicated to buying and developing properties for businesses in the marijuana industry. The company now owns 12 properties located in Arizona, California, Colorado, Illinois, Maryland, Massachusetts, Michigan, Minnesota, New York and Pennsylvania, totaling approximately 1,070,000 rentable square feet. Revenues in the latest quarter were up 152% from the year before! Readers who’ve been with me from the start (mid-2017) now have a profit of 209% in the stock, but I’m still recommending buying on pullbacks.
Then there’s the U.S. company that serves the marijuana industry with a wide variety of totally legal products and services, and which saw revenues grow 186% in the latest quarter. My readers have a profit of 193% in the stock, but it’s been basing for a while (it marches to a different drummer than the pure marijuana stocks) so I recently averaged up in the Cabot Marijuana Investor portfolio.
And then there’s my most recent addition, a small but fast-growing company focused on the CBD (cannabidiol) market. The stock only came public in September, and it’s still a very low-priced stock (under $3 a share) but with a strong trend; it jumped 10% in one day recently!
Short term, this remains a very volatile sector; anything can happen. But long term, the marijuana industry is guaranteed to get much, much bigger, so the earlier you get in on marijuana stocks, the better.
And if you need someone to guide you through this relatively nascent sector, I’m here to help. You can sign up for my Cabot Marijuana Investor advisory, which I launched in August 2017 and has an average return of 167% among its 16 current holdings (including the three stocks described above), by clicking here.
Timothy Lutts heads one of America’s most respected independent investment advisory services. Each week, Tim personally picks the single best stock in his exclusive Cabot Stock of the Week advisory. Build your wealth and reduce your risk with the top stock each week for current market conditionsLearn More
*This post has been updated from an original version.