Before you lay down your money on cannabis stocks, step back and consider all the risks. While some folks have made a lot of money riding pot stocks up, there’s also the possibility of a big crash.
“Some of them have done extremely well, especially when there is a positive news story that comes out,” said Manmeet Bhatia, senior vice president, Qtrade Investor.
There’s been a lot of hype in the lead-up to the legalization of recreational marijuana such as news of big booze companies signing deals with Canadian cannabis companies to make cannabis-infused beverages. When that news hits, the stock prices rise.
“And hype is putting it mildly. People are saying we haven’t had a run up on shares like this since the dot com bubble,” pointed out Andrew Bell of BNN Bloomberg. “I personally, for what it’s worth, wouldn’t go near these stocks right now.”
B.C.-based Tilray is one cannabis company that has seen huge swings in its stock price. In July, it was trading around $17 a share. In September, the price jumped to nearly $300 a share before settling back down to around $200. A lot of the volatility driving up the price is due to investors trying to buy up a limited amount stock in order to short sell it – meaning they believe it will fall.
“Earnings have been the biggest issue,” said Bhatia.
No one knows just how much demand there will be after recreational marijuana is legal.
There are some things for investors to consider. Take a look at the stock price compared to the revenue.
If you invest in smaller companies, you could potentially get a larger return, but the risk is also higher.
Companies with proven track records in the medical marijuana industry and those that have secured contracts may be better positioned for stable revenue.
“It’s times like this that the fundamentals of the security take a second seat to the growth story or the narrative,” Bhatia noted.
Those who invested early have been the big winners. However, that also depends on whether they sold or are still hanging on looking for greater returns.
If you do plan on investing in cannabis stocks, consider investing as much as you’re willing to lose. If you are fortunate to see big gains, you may also want to consider cashing out some of your portfolio to balance out the risk of loss.
And to further limit your risk, consider exchange traded funds that invest across a broad range of cannabis companies – big gains by some of those stocks will offset losses by others.
Also, investing in cannabis related industries may be less risky. Those are the ones that will service a large number of cannabis firms by providing the fertilizer, packaging and other delivery systems.