How ‘High’ can Cannabis Stocks Go?

By Derek Eckert

An unlikely new market, one that very few could have predicted only a decade ago, is unfolding as the legalization of marijuana is becoming more widely accepted. Further boosting this market is medical validation of CBD, medicinal and recreational legalization of marijuana in other countries, and the near infinite commercial applications of marijuana’s sibling, hemp. Many of these newly formed companies are experiencing stratospheric returns as publicity spreads and acceptance grows.

The hype surrounding these companies, specifically those that trade publicly, is reminiscent of the one witnessed more than 20 years ago as a seemingly infinite number of companies popped up on the Internet. Some companies—unheard of, untested, and without any sales or products to speak of—went public and experienced eye-popping returns. So much so, that simply to cash in on the trend many conventional, long-standing companies simply rebranded themselves by adding the requisite “.com” to their name—although some barely had a homepage on the internet.

Over the years there have been many other manic markets as new technologies, products or physical territories become available to investors. Predicting the success of the sector is difficult enough. Predicting the success of any individual company is exponentially harder. Dozens of companies that no longer exist today had valuations far higher than Amazon at the close of the century.

Seriously evaluating an individual company’s stock is arduous; it requires poring over quarterly reports, SEC filings, understanding their marketing strategy, supply chain, partners, key personnel, etc. Performing this exercise for newly minted companies is far trickier since most don’t have the historical records, are apt to shift their strategies, lose key executives due to differences in vision, and frequently test out new products and markets until they find one that works.

It is always safer for individual investors to buy into broader, more diverse holdings such as mutual funds or ETFs, and probably doubly so for new industries that haven’t stood the test of time. There is no doubt that there is demand for marijuana. It has been around for centuries and seems to have a diverse market and appeal around the world. Marijuana has an expansive and proven black market verifying its demand. As more governments begin to realize the revenue opportunity (via taxes), marijuana will likely become legal at more levels in more places.

However, it’s simple economics that trying to pick the winners will more likely leave potential investors poorer. For instance, there were dozens of search companies in 1999. How many of those are still around today? As any industry matures, the brutal competition thins out those whose business model did not fit any particular market. Some companies get bought out or merged, while others who may have simply jumped on the bandwagon will abandon the business and pivot to what they see as the next big one.

Those that still feel inclined to participate in this market should connect with an experienced and trusted financial advisor. The advisor should insist on conducting a full assessment of your net worth, existing portfolio, risk tolerance and time horizon. And even then, any investment to such a niche sector of the overall market should be a minimal component in your investment portfolio.

Derek Eckert is the managing director of Syntropy Wealth Management, an Austin-based financial management company. For more information, visit SyntropyWealth.com.