How to Invest in Marijuana Stocks

There is a growing popularity surrounding marijuana stocks and their potential in the stock market. There are multiple factors leading to this popularity. For one, the impending probable legalization of marijuana here in Canada is fuelling people’s desire to invest. In addition, the recent success of Donald Trump in the US election means that Canada will likely have a step-up as being the first major producers of marijuana. This anticipation has been illustrated recently, with record volumes of movement for publicly traded marijuana stocks.

On the other side of this, there are many people who think these marijuana stocks are creating another bubble. Ever since the inception of the stock market, there have been bubbles that burst, sending stocks crashing down. A popular example of this is the dot-com bubble that burst in the late 90s. The marijuana industry is almost eerily similar. Hype surrounding an industry is rising to all-time highs. The questions is, will it all come crashing down around you if you decide to invest?

The Marijuana Stock Bubble

The popularity and hype surrounding marijuana stocks right now certainly has the potential to create a bubble. With so much popularity, I encourage everybody to be skeptical before simply buying in. As always, the most important thing about investing is making sure that you understand what you’re investing in. Do your research and your due diligence to ensure that you’re investing in a quality company.

Most current marijuana stocks don’t make money. That means that they are not yet profitable. Whenever you invest in something that doesn’t make money, you run the risk of gambling. Companies that aren’t profitable are risky, so this entire industry looks risky at the moment. However, it is difficult to make money in an industry that is not legal for recreational use yet. That’s why getting in now can mean that you’re getting in early, before the profits start rolling in. The problem is, you don’t know if they will roll in.

In my opinion, the biggest difference between the potential marijuana bubble and the dot-com bubble is large. Marijuana stocks have  a real industry with a customer-base that is ready and willing to purchase. Instead of relying on speculation, you can know that there are plenty of people who will be purchasing marijuana from these companies. Therefore, there is something real backing the hype with these companies.

How to Invest in Marijuana Stocks

Despite the potential for a marijuana bubble, there is still fairly good reason to invest. Unlike the dot-com bubble, the hype around marijuana is somewhat justified. There is a real business to be had beneath the speculation. All of the speculation will cause volatility in the short-term, but long-term investors have the potential to do well if they can hold on through the ups and downs.

Obviously, you’re going to want to invest in an industry leader in a situation like this. Popular names that have been rising and falling by huge margins are Canopy Growth Corporation(CGC), Aphria Inc. (APH) and Mettrum Health (MT). CGC is the only one currently listed on the TSX, but that will change soon. I encourage everybody to do some fundamental analysis on these marijuana stocks before investing.

If the actual industry stocks are too risky, try looking at pharmaceutical companies. These are established companies that will be selling marijuana. Because these are established companies, you can feel more comfortable about investing in them. On the other hand, you’ll sacrifice some potential for growth. Companies to look at here are Loblaws (L) and Jean Coutu Group (PJC.A). Loblaws owns Shoppers Drug Mart, which has a 40% stake in the pharmaceutical industry. Meanwhile, Jean Coutu is the only pharmacy-only stock left on the Canadian market. Do some analysis here, and see if these companies look good to you.

Conclusion

The marijuana industry is set to explode with the impending legalization expected to be tabled this spring. Because of this expectation, marijuana stocks have been rising at an unprecedented rate. The volatility has me, and many other investors, wary that we are in the midst of a bubble. However, this bubble is backed by a strong consumer-base and deserves more research.

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