With almost all cannabis shares down lately, is now a good time to pick up shares of cannabis penny stocks? Here’s our answer

We launched our Pat McKeough’s Inner Circle service 17 years ago. From the start, we have always aimed to cover a wide variety of stocks and other investments, relying on our members to request our advice on matters of interest to them. In the first two or three pages of each issue, we aim to analyze and explain a wide variety of investment situations that our members are likely to encounter.

We departed somewhat from that pattern in 2018—specifically, on the first few pages of each issue from June 12 to October 2. While we kept up a reasonable amount of variety, we mentioned the word “cannabis” 51 times, on 11 different pages. All mentions were cautionary if not outright negative.

Now some are asking, “Cannabis stocks are down lately, and especially cannabis penny stocks. Is this a good time to buy those speculative shares?” Here’s our view:

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Why are cannabis stocks dropping today? The market is growing more volatile

Shares of established marijuana producers such as Canopy Growth, Aphria and Aurora Cannabis continue to attract the interest of investors looking to add to the aggressive portion of their stock portfolios.

Prices of these stocks are still way up since 2016—but are down lately. That’s especially so with cannabis pennies. Now, that retreat from their highs may tempt some investors to look for the next “up-and-coming” low-priced cannabis stock.

There is a continual stream of new marijuana penny stocks. Most trade over-the-counter in the U.S., but Canadians can buy them through their brokers. These have come on the market aiming to take advantage of legalization in Canada and strong investor interest.

However, buying lower quality marijuana penny stocks is one of those moves that can appear to be successful before it goes wrong. Some investors get hooked on it, since low-quality stocks can be highly profitable over short periods. That’s because they are generally more volatile than high-quality stocks.

It may be appealing to look for penny marijuana stocks to buy, but there will also be significant risks.

High market caps still leave cannabis stocks vulnerable

The speculative appeal of Canadian cannabis stocks continues to attract investors looking for a “ground-floor opportunity.” However, the pioneers in an industry are not always the ones who survive.

Small marijuana producers have to overcome all the usual obstacles that small and start-up companies face. As well, there are low barriers to entry for new marijuana producers. If demand grows large and profitable enough, major agricultural and drug companies, as well as tobacco firms, are likely to enter the field and take sales away from small growers.

Considering their current sales, many Canadian producers have very high “market caps” (the value of all shares outstanding). That means they need huge revenue growth even to justify their current stock prices. If revenues merely hold steady, their stock prices will be vulnerable.

“Pot-of-gold” penny stock promotions can be misleading—and costly for you

We have seen many highly speculative “pot-of-gold” penny stock promotions. These typically arise in new industries.

Stock promotion is a take-the-money-and-run type of business. Most successful entrepreneurs value their reputations, and want to build a profitable, sustainable business that can pay off for investors. So they generally go into some other line of work, and stay out of stock promotion.

We advise staying out of stock promotions of Canadian marijuana stocks businesses or anything else. They attract the wrong kind of people.

These days, it’s faster and easier than ever to launch a stock promotion, thanks to the Internet. One recent “penny pot” investing stock scam almost seems like an MBA-style case study on how to launch one of these frauds online. To avoid being taken in, it pays to read more, and to think before you invest.

A speculative stock is a higher-risk, more aggressive stock with uncertain prospects. Speculative stocks may offer significant returns to investors—but they will also have risk to match.

The odds are against you when you invest in speculative stocks and companies that have year to make a profit. Some, if not many, of these companies will never make any money.

Bonus tip: Use our three-part Successful Investor approach to make the best stock picks

• Hold mostly high-quality, dividend-paying stocks.
• Spread your money out across most if not all of the five main economic sectors: Manufacturing & Industry, Resources & Commodities, Consumer, Finance and Utilities.
• Downplay or stay out of stocks in the broker/media limelight.

No leader has yet emerged from the Canadian cannabis market. This is making many investors frustrated, and decline is happening as investors shift their focus. Are you investing in cannabis? What would you have to see within the industry to invest going forward?