2018 was a tough year for long-term buy and hold marijuana investors. As a whole, the industry went on quite a wild roller-coaster ride. Marijuana stocks popped in December 2017 as anticipation for the ‘legalization’ of the drug occurred in the state of California on January 1st, 2018. We saw stock prices and the ETFMG Alternative Harvest ETF (MJ) jump as investors anticipated a ‘boom’ for the industry.
But, within a month or so of the legalization date, most of the marijuana-related stocks have fallen in price and MJ was trading below its December 2017 price. A few months went by, and most of the industries stocks just meandered along. Then the next big ‘legalization’ date grew near, October 17th, 2018, the day marijuana became legal in Canada.
The price of most of the well known and many of the lesser-known marijuana stocks, and MJ of course, once again began to ski-rocket. MJ, for example, went from $24 per share in August 2018, to as high as $45 per share, with its peak occurring just days before October 17.
Each time a new State or large country legalizes the drug, the companies in the industry experience an unfound increase in their valuation as investors buy shares at an insanely high rate. This type irrational buying leading up to a hyped up, essentially arbitrary date has put a lot of investors in a really bad place in 2018. MJ for one is down more than 24% in 2018, while other individual marijuana companies have seen their stock prices fall even further.
The first reason you should not buy MJ is the lack of equity buyers shortly. The hype that caused the two most recent pops in the industry is no were to be seen since as of now the industry and very little high profile ‘legalizations’ set to occur. The other side of that coin is because a lot of investors are in the red with MJ and individual marijuana stocks in 2018 and because of that, most of those investors aren’t likely going to be trying to put ‘new’ money to work in the industry anytime soon.
The next reason is that marijuana companies are still not profitable and aren’t likely to be profitable anytime soon. Yes, I understand that these are growth companies, but that still doesn’t mean they deserve noise bleed valuations. Canopy Growth (CGC) the largest marijuana company plans to expand growing capacity and make other large expenditures in 2019, meaning it very unlikely they will be able to show profitability even on an adjusted basis. Most of the other companies in the industry are doing similar things; spending money today, with the hopes of making more later. But, that’s the key, hope of making more later. There is no guarantee any of them will ever make money. Not the large ones, not the small ones and when you buy MJ, you are buying both groups.
MJ currently has a price to earnings ratio of -354! That figure needs to improve dramatically before risking money in the investment is anything more than a prayer. We are likely a decade or more away from a time when the majority of the marijuana stocks will be profitable, but remember when we are buying an ETF, its because we want the safety of numbers. The thinking is that the ‘good’ stocks inside the ETF will offset the ‘bad’ stocks. Well, in its current form, its hard to tell if there are any ‘good’ stocks in MJ since none of them are profitable companies.
And that brings us to the third and final reason you should hold off on buying MJ today. The hype that built up before the legalization in California or that built up before marijuana was legal in Canada has lost a lot of investors, a lot of money. Hype and the ‘fear of losing out’ is never a reason to buy or sell an investment.
Wait until the time is right and you can actually see the businesses that you are buying are performing well. Despite Canopy being the largest marijuana company today, doesn’t mean that is going to be the case in a year from today, let alone five or even ten years. Be patient and allow the industry to develop before jumping in head first. Learn about the companies in the industry, who is the best at producing, who is better at distribution, who has a monopoly on the specific type of product, etc. Wait and learn more about who could be the ‘best’ company in the industry and why. But unfortunately, that information will only be gained with time and through documents like company 10-Q and 10-K reports.
The past few years have shown us that despite the potential the industry may have moving forward, investors have thus far been much better served merely sitting on the sidelines and watching things play out in front of them.
Disclosure: This contributor did not hold a position in any investment mentioned above at the time this blog post was published. This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.