Canadian marijuana stocks increased dramatically from mid-2016 through the end of 2017. However, in the first quarter of 2018, they began to fall just as dramatically and they still may have a ways to fall. It has been quite a roller coaster ride for people who invested money in these companies. Due to the fact that many of these Canadian marijuana stocks are overvalued (in our opinion) and there has been delays in opening up dispensaries for recreational use of cannabis in Canada, there is some inherent risk in investing in marijuana stocks in Canada at this time.
When stock prices and headlines swing in concert, it is a problem. The prices can rise on news of liberalization of rules and laws that expand market size. The prices can fall just as quickly when that information is found to be only a rumor. Speculation can also generate news so it becomes a feedback loop that can go either way.
Currently the value of cannabis stocks is based on speculation and doesn’t necessarily reflect actual sales. Although the industry is poised for growth changes in regulations and the expansion of licensing will have a strong effect on future sales. If businesses don’t experience strong growth in sales to match their speculative stock prices the bubble will pop at the investor’s expense.
New industries often have a number of small businesses selling penny stocks and the cannabis industry is no exception. Penny stocks tend to attract people who make their money and get out. These kinds of stocks rely on the build up that happens from promotion and media hype. When the price starts to slip (usually just as fast), it can snowball to prices which are lower than the original price most investors paid. Don’t lose your money!
It’s also important to remember that industry pioneers will not necessarily succeed in the long term. Some cannabis companies will be successful long term but many will not. A cannabis business owner’s ability to efficiently scale while maintaining a consistent quality product and a strong brand reputation will influence his/her long term success. Many cannabis industry pioneers are small businesses and have much to learn to truly thrive long term. Always remember the first rule of investing “Don’t invest money which you can’t afford to lose.”
It might seem like it would go without saying but you must properly vet any businesses before you invest in it. What is their unique position in the marketplace? How much competition is in their particular niche? What type management team do they have and what is their track record with other businesses?
We have a partner company, Multiverse Capital, with three cannabis funds. One is for medicinal cannabis companies, one is for adult-use cannabis companies and one is for ancillary companies, including real estate. One way to reduce your risk is by spreading it out over many companies as opposed to putting all of your eggs in one basket.
Are you considering investing in cannabis?