Should You Invest in Marijuana Stocks?

Public support for Marijuana has grown steadily in the last few years, as the people have realized the medicinal advantages of Marijuana. This growth in public support is creating a paradigm shift both in the medical community and government.

What does this mean? Previously, Marijuana was considered as a psychoactive herb with addictive properties and thus outlawed because of its perceived harmful side effects.

THC vs CBD

The main psychoactive (mind-altering) chemical in marijuana, responsible for most of the intoxicating effects, is delta-9-tetrahydrocannabinol (THC). For this reason, Marijuana was banned and was not considered for its potential medicinal benefits.

Recently, research has proven that Cannabidiol (CBD) is a substance that is present in Marijuana and Hemp and this chemical has been proven to exhibit medicinal and therapeutic properties. CBD itself does not cause a high and is not a banned substance like THC, furthermore, it has been proven to provide relief to patients of epilepsy, especially childhood epilepsy, anxiety, insomnia, and other sleeping disorders. It can also be used to treat many cases of chronic pain.

Legalization of Medical Marijuana

In light of this research, a paradigm shift is occurring in the medical community regarding the usage of medicinal marijuana. This change in the opinion of medical experts has in turn brought about a change in the thinking of government and we have seen that many states in the USA have legalized medicinal marijuana, the same goes for Canada. This legalization of medical marijuana has created business opportunities and many businesses working with medicinal marijuana have gone public to raise finance for more research-based projects for the usage of medicinal marijuana.

This was a brief background about the legalization of marijuana and the business opportunities it has presented. The question now is, should one invest in marijuana stocks? Does this market show any promise of profitability in the future?

In order to find the answers to these questions, we have to look at the companies and the whole supply chain. It is true that the legalization of medicinal marijuana has brought in a lot of money in this sector and businesses are now investing heavily, especially the beer and tobacco companies are now competing to capture the market by pouring in money in this market. Since so much investment is coming in, the market is set to expand and grow in the future, so far it has not shown the promised rate of growth but it is expected to grow in future as more opportunities present themselves. It has to be kept in mind that the medicinal uses are being discovered and as more research is done, more products and uses will be discovered, which will fuel the growth of this market.

Investing in Cannabis

Having said this, let us now look at this from the perspective of potential investors. Investors look for hard facts, they can base their decisions upon. The “potential for growth” is not a hard fact. Investors want to make profits on their investment and profit can only be made if the market is making enough profits. So far the medicinal marijuana market has not shown the profits that the investors were expecting in spite of so much investment. Possibly because the market is still in its infancy and requires more time to actually be on a trajectory to churn out profits for investors.

If we look at the market positions of some of the leading medicinal marijuana producers, we see a downward spiral in the market. Share prices of Cronos Group (CRON) and Canopy Growth (CGC) have fallen by more than 60% since this time last year, Shares of Aphria (APHA) have fallen by almost 10%. Pyxus (PYX) Aurora Cannabis (ACB), Tilray (TLRY), a cannabis company has seen a drop in share value by 66%.

One way to assess the strength of companies is through their earning potential, judged by this standard, the marijuana stocks do not seem to be doing too well. The indicators show that the marijuana market is losing money. While the companies are valued in billions of dollars, their earning is in the million-dollar mark and not abreast with the rate of expansion the industry is currently experiencing.

In order to further substantiate this, let us look at the Earnings per Share figure. Earnings per share show the earnings attributable to ordinary shareholders for every share that has been issued. Marijuana stocks do not rank high in the EPS figures. Innovative Industrial Properties has an EPS rating of 80 out of 99 (99 being the best), Canopy stock has a rating of 1. The worst possible rating for EPS that a company can get.

This shows that the medicinal marijuana market or industry is not doing as well as the investors were expecting it to perform. From the investor’s point of view, there really isn`t much in the industry at the moment to bank in spite of high growth. This is similar to the phenomenon being faced by the tech sector companies like Uber and Lyft. They have attracted a lot of investment and have expanded rapidly, this expansion resulted in the investors pinning their hopes of making high returns, which did not happen. Rapid expansion was not complemented by a similar rise in the earnings and profits for the tech sector. The same is true for the medicinal marijuana sector. Investors poured in their money when Canada legalized medicinal marijuana but since then revenue and earnings have not risen according to the expectations.

One reason for this discrepancy is that consumer prices have gone down, resulting in reduced earnings. Another reason is that the market is simply in its infancy and the initial enthusiasm of the investors was not met with a similar response by the consumers. Investors who are in this for the long haul understand that currently the stocks are overvalued due to the hype surrounding the legalization and the persistent drop in market value is a way of auto-correcting the value and in the long term the market will produce promising earnings but this will not be the case in the near future as marijuana stocks are not only falling in value but they are showing extreme volatility.

Originally posted 2019-11-21 23:00:04. Republished by Blog Post Promoter