I hate to say this, but despite the media attention and markets that have opened up to the marijuana sector, there is still a ton of uncertainty. One factor that all marijuana stocks can agree on is that they are all highly speculative. This means that their stocks are highly volatile, susceptible to major fluctuations, and often they are not a good way to diversify your portfolio.
You may have noticed that some stocks have a few things in common: They usually trade in the mid-price range. They are the ones that are usually the most volatile. They are usually the ones that are growing the fastest and are seeing the biggest growth. They all have a few little things in common.
Marijuana enterprises are not allowed to quit
The marijuana market is maturing. This may seem obvious, but we often forget what it means. As the market matures, the focus shifts, with some cannabis companies focusing more on profit than growth. This is a common trend that we see in almost all emerging industries. But acting too quickly can cost marijuana companies millions of dollars in future revenue. Unfortunately, this is a mistake that many large cannabis companies make. Remember, the legal marijuana market was virtually non-existent about five years ago. There wasn’t much of an economy under legal marijuana. No major American politician has supported the legalization of marijuana. There are few, if any, polls in the U.S. that show a positive attitude toward marijuana legalization. Today we are seeing significant progress in all these areas. We also see some marijuana companies focusing more on profit at the expense of growth. In my opinion, it was premature when I first saw it in 2019, and it’s still premature today. Why? Because there are so many growth opportunities in the marijuana market. If pot companies focus too much on the bottom line, they risk missing out on the future potential of the sector. In the next decade, we will see the legalization of marijuana spread across the world. The United States, the United Kingdom, Germany… Many states could legalize marijuana at the federal level in the coming years, creating a market worth tens, if not hundreds, of billions of dollars within a few years. Note that the largest publicly traded marijuana stock, Canopy Growth Corp (NYSE:CGC), currently has a market value of approximately $10.0 billion. Weed stocks have not yet exhausted their potential global market size. And when marijuana companies downsize and scale back their operations and keep a tight hand on their purse strings, they miss out on big profits in the long run. By not investing in the fundamentals that would allow them to fully exploit their market potential, the big cannabis companies are leaving the challenge to their competitors. As competitors move into an environment where they can easily conduct initial public offerings (IPOs) on the major U.S. stock exchanges and raise significant capital from institutional investors willing to get involved from the start, we could see significant new marijuana stocks emerge in the U.S. virtually overnight. Allowing this to happen would be a huge mistake for existing marijuana businesses. This could cost current cannabis producers a large portion of the market in the future. What does this mean for marijuana investors? This means that it may be wise to invest in stocks of companies that are looking to expand their market presence. We really need to look at this from a long-term perspective. Of course, a jump in profits in the present will send some marijuana companies soaring as they impress investors with a great quarterly report or two. But after the quarterly reports, many investors will focus on growth. If marijuana companies can’t grow and make a profit, they’re dead. They won’t really create much value for investors. While there are increasing opportunities for marijuana companies to grow in the future, there may be no better time than now to invest in the marijuana industry. This is due to the emergence of new markets, very few of which are dominated by incumbents. This means that large, established marijuana companies will have the opportunity to claim a larger share of the pie. They have the production capabilities, knowledge, resources, relationships, etc. to gain a significant advantage over their future competitors. If they begin to slow down their investments in production capacity, research, development, and expansion into new markets, they will miss a huge opportunity with the expansion of the legal marijuana market. In other words: Pot companies should not mortgage their future for the sake of the present. Therefore, investors should look out for marijuana companies that are willing to invest in future opportunities. In my opinion, this is the best way for basket investors to make significant returns.
The best things in life come to those who wait. It’s a cliché, of course, but I think it also applies to the marijuana stock market. The marijuana industry has a very bright future. Hardly anyone disputes this. One wonders at what point and when we will begin to see light on the horizon. While I don’t have exact answers to these questions, I can tell you that the dawn is inevitable. Within a few years (or decades), marijuana will become legal in the United States, Europe, Asia, and virtually the entire developed world. Following this logic, any company that can position itself now to take advantage of these emerging markets will be able to reap the most value later. Companies that remain too focused on winning in the present may end up resenting being left in the shadows, while competitors who are more forward-thinking bathe in the light.
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