The best cannabis stocks may still have gains ahead. But the odds are very much against finding another boom
We don’t recommend cannabis stocks for conservative investors. But some stocks are okay to hold for highly aggressive investors who want exposure to the marijuana industry. You can find these stocks by signing up for our free TSI Cannabis Investing Bulletins using this link: https://invest.tsinetwork.ca/cannabis-newsletter/
Meanwhile, here’s some perspective on the cannabis boom that took hold in 2016—and how it can relate to the search by some investors for the next “ground-floor opportunity.”
In October 2018, a couple of weeks before Canada’s legalization of recreational marijuana, I sat in on a live broadcast of “The Current,” a CBC radio program, on the subject of the cannabis stock boom. It began with an almost-too-good-to-be-true interview with Rob Armstrong, a real, live GRQ (Got Rich Quick) investor.
Rob heard about the cannabis boom in 2015, because he was already a medical cannabis patient at that time. He felt this offered a great opportunity, so he decided to cash in his $37,000 RRSP and invest it all in cannabis stocks.
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The best cannabis stocks can lead to riches, but they may also be a major gamble
Rob ended up going “all in” on what he saw as the upcoming cannabis boom.
Whether you call this a brilliant move or a lucky break, it turned out to be a life-changer. In 18 months, his $37,000 turned into $1 million.
As I said, this sounds almost-too-good-to-be-true. But the discussion that followed made me believe every word. Rob had no prior investing experience. He talked about the violent fluctuations in the value of his cannabis portfolio, and the emotional impact this had on him. He mentioned that he had a daily commute of one hour, and recalled the first time that the value of his portfolio dropped by $60,000 on his way to work. He also said his portfolio’s value gained $140,000 in a single day.
After he made the switch in his RRSP, he wisely decided to try to learn everything he could about investing. The cannabis boom, the value of his RRSP and related issues came to dominate his days. He decided he needed an exit strategy.
He said that deciding when to sell was proving much more difficult than the decision to buy; this led him to develop an interest in technical analysis. He decided he needed to diversify, and did so by switching into a variety of cannabis stocks in various stages of development. He began reading all the press releases, media stories and so on about his cannabis stocks and the cannabis business, and made plans to sell some of his best cannabis stocks when they began trading on Nasdaq.
My thoughts on this interview and what are considered the best cannabis stocks available
I found the interview highly entertaining, if only because of its classic Canadian elements. To start, the subject is an independent-thinking Canadian who disregarded the bad reputation of Canadian penny stocks, and made a fortune.
After being introduced and asked about Rob’s story, my first reaction was, “Somebody’s gotta win the lottery.” I went on to repeat our TSINetwork.ca view, that cannabis stocks are in a classic stock-market boom. I advised listeners to keep in mind that Rob got in the boom with personal knowledge of cannabis, and he has a three-year head start on investors who are now thinking about taking a plunge. After all, stock booms don’t last forever.
I had the odds of success in mind when I compared the cannabis stock boom to a lottery. As a group, lottery ticket buyers only get back perhaps half of the cost of all the tickets that have been sold. The odds may be worse in a stock boom. Conventional investment safeguards can do little to protect you against that kind of disadvantage.
Rob mentioned the efforts he has put into diversifying his portfolio. But it seems all he did was spread his money out across a number of cannabis stocks. This provides a false sense of security. Diversification only cuts risk if you invest in a variety of well-established companies that vary according to economic sector, industry, value/growth characteristics and other measures. When the cannabis boom deflates, all cannabis stocks will suffer.
He also spends time in devising sell targets for his cannabis stocks. Our view is that, due to the random factor in short-term stock price movements, this is little help even with conservative stocks. Setting sell targets is apt to be far less helpful with today’s cannabis stocks. The more speculative a stock is, the bigger the random factor in its performance.
One good rule is that if you feel you need to set sell targets for a particular group of stocks you own, you probably should sell most if not all of them.
Today’s still-high share prices for many of the best cannabis stocks spotlight two warning factors that you’ll need to consider before investing:
Stocks that have gone up far quicker than the indexes for several years make us wary: When companies create that much wealth, that fast, they often carry the seed of their own downfall. That’s especially true of top-performing stocks that owe their success to several other wariness factors. One common combo is dependence on acquisitions, coupled with a boom (or a streak of luck) in a highly unpredictable industry. Both are true of many of today’s cannabis stocks.
Outsized market cap in relation to sales and earnings: Many Canadian cannabis producers have very high “market caps” (the value of all shares outstanding). That means they need huge revenue and earnings growth to justify even their current stock prices.
Will the best cannabis stocks make it into your diversified portfolio?
What are your thoughts on cannabis stocks? Do you think there is a crash coming or do you think there is still a lot of room to grow?
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