Published May 14th, 2019 by Tim Lutts
This is a guest contribution from Tim Lutts, the Chief Investment Strategist for Cabot Marijuana Investor.
For people who are serious about making money in the stock market, one of the best things you can do to improve your chance of success is to understand why stock prices move up or down.
This can be a due to a number of reasons, but the simplest reason is an imbalance of supply and demand for the stock. If supply can’t keep up with demand, as can be the case in a newly public company or emerging industry, prices rise. That’s the reason shares can often climb in the days following and IPO, and it’s one reason marijuana stocks are up over the past few years.
And what’s behind the strong demand for marijuana stocks? We know it’s not growing earnings because, like Lyft or the soon-to-IPO Uber, most of these companies have no earnings yet. They’re putting any money they take in from selling shares into growth.
So, for marijuana stocks it’s not growing earnings, it’s changing perceptions that are driving up values, and the changing perceptions are being driven by 4 factors.
4 Drivers of the Marijuana Stock Values
Factor #1: Canada has already legalized marijuana commerce (in October) and slowly but surely, state by state, the U.S. is moving to do the same.
Factor #2: 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.
Factor #3: 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.
Factor #4: 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. There are a number you can buy, either immediately or on brief pullbacks. Some of these are Canadian producers and some are U.S. multi-state operators.
Plus, there are ancillary businesses that are actually legal nationwide in the U.S. but are benefiting from the booming marijuana industry, by providing supplies, equipment, or other services required by marijuana producers, retailers, and distributors.
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.
In addition to being the CEO and Chief Investment Strategist for Cabot Wealth Network, Tim Lutts has been covering the marijuana industry since 2016 and writes the Cabot Marijuana Investor advisory, launched in August 2017, and which has an average return of 167% among its 16 current holdings.