Cannabis Stocks: Buy? Sell? Hold?
I Get it, your 42 years old, three kids, a pension and a 401k. You smoked a little pot in high school and college so you feel that you have a connection to the industry. And you do! You would love to invest and stake your claim, but again, the three kids, the pension and the 401K… Have no fear, corporate cannabis is here and it is publicly traded in the US and Canada! Let’s talk Cannabis stocks and the current outlook…
Understanding the Landscape
The marijuana sector has experienced a rollercoaster of growth and decline since the early days of legalization. In the past few years, we’ve seen a surge in interest as more states in the U.S. have legalized marijuana for recreational and medical use. However, this growth has been met with volatility, particularly as companies grapple with federal regulations, market saturation, and changing consumer preferences.
Recent Trends
Market Volatility: Marijuana stocks have been known for their volatility. After a substantial boom in 2019 and early 2020, many stocks saw significant downturns. Companies that were once considered "can’t-miss" investments found themselves struggling with oversupply, high operational costs, and intense competition. During the pandemic, cannabis sales reached an all time high. Many operators, scaled up operations and when product sales slowed down a couple years later, the industry was left with excess supply. This put even some of the larger publicly traded companies in a bind as they faced dropping prices across the board.
Federal Regulations: The looming possibility of rescheduling cannabis from a Schedule I to a Schedule III drug could fundamentally change the landscape. This potential shift has fueled optimism among investors. Rescheduling would not only ease some banking restrictions but could also encourage institutional investors to enter the market.
Earnings Reports and Performance: As companies report their earnings, trends show a mixed bag. Some firms are pivoting to focus on profitability rather than growth, while others are still chasing aggressive expansion strategies. Investors need to scrutinize these reports closely to gauge the long-term viability of their investments.
Consumer Trends: The market is witnessing a shift in consumer preferences. Brands that focus on quality, sustainability, and innovative product offerings are gaining traction. The rise of the wellness movement has also given a boost to CBD products, creating a bifurcation in the market that investors should be aware of.
Key Players in the Market
Some companies stand out in this fluctuating market. Established players like Canopy Growth and Aurora Cannabis are adapting their strategies, focusing more on profitability and operational efficiency. Meanwhile, newer entrants, particularly those involved in the CBD market, are seeing growth as consumers increasingly turn to alternative wellness products.
Should You Buy, Sell, or Hold?
1. Buy:
Long-Term Outlook: If you believe in the long-term potential of cannabis and are willing to weather short-term volatility, investing in established companies with a solid operational strategy may be a wise move. Not sure which company fits that bill? No problem, check out an ETF that trades under MSOS. Like most ETF’s it is a similar to a mutual fund in that the fund is diversified across the entire cannabis industry, hopefully hedging some of the volatility that comes with individual stocks. Being an ETF, it trades like a stock and can be bought and sold on the open market.
Emerging Markets: Consider stocks in companies that are expanding into international markets or those focusing on innovative products, especially in the CBD and wellness sectors.
2. Sell:
Underperformance: If you’re holding stocks that consistently underperform or have not adapted to changing market dynamics, it may be time to cut losses.
Speculative Investments: Stocks that rely heavily on speculative hype without a solid business plan or revenue generation may not be worth holding onto.
3. Hold:
Wait and See: For investors who have positions in companies with potential but are experiencing temporary setbacks, holding might be the best option. The potential for regulatory change could significantly impact stock prices in the coming months. There are many companies such as Schwazze, (ticker SHWZ) a regional player in Colorado and New Mexico, that make money on paper, but due to the current lack of interest in the industry, are trading at an all-time low. If you happen to be into any of these plays, you could easily make the argument to hold on to a stock, rather than take a 75% loss.
Diversification: If your portfolio includes a mix of cannabis stocks along with other investments, holding could allow for a balanced approach as the market continues to fluctuate.
The Role of Rescheduling
The talk of rescheduling cannabis is a game-changer. If cannabis is rescheduled, it could lead to:
Easier Access to Capital: Banks may become more willing to lend to cannabis companies, reducing operational challenges and increase efficiencies.
Increased Institutional Investment: With less regulatory risk, institutional investors may start entering the space, potentially driving stock prices up. Currently, cannabis stocks trade around 7X EBITDA, whereas the average stock on WallStreet demands 15X EBITDA!
Broader Acceptance: Rescheduling could lead to a shift in public perception, paving the way for wider acceptance and adoption.
Conclusion
The current state of marijuana stocks is complex, influenced by market dynamics, regulatory changes, and evolving consumer preferences. As an investor, your decision to buy, sell, or hold should be informed by thorough research, understanding market trends, and staying updated on legislative changes.
The cannabis market is still in its infancy, and while the potential for growth is immense, so too are the risks. Whether you choose to jump in, step back, or hold tight, maintaining an informed perspective will be key to navigating this ever-changing landscape.