Investors should be alert to “wariness” factors in marijuana stocks

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Investment Outlook

As cannabis stocks face the challenge of generating revenue in a legal marketplace, investors have plenty of “reasons for wariness,” especially given these factors.  


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Over the past few decades, we’ve built a list of what we call “reasons for wariness.” No single one of these factors is a sure sign of a bad investment. But we watch out for them when analyzing investments, especially where we find more than one.

When we spot reasons for wariness in a stock, we want to be sure that investors understand the risks.

The ultrahigh share price of many cannabis stocks spotlight two wariness factors:

Stocks that have gone up far quicker than the indexes for several years make us wary. When companies create that much wealth, that fast, they often carry the seed of their own downfall. That’s especially true of top-performing stocks that owe their success to several other wariness factors. One common combo is dependence on acquisitions, coupled with a boom (or a streak of luck) in a highly unpredictable industry. Both are true of many of today’s cannabis stocks.

Outsized market cap in relation to sales and earnings. Many Canadian cannabis producers have very high “market caps” (the value of all shares outstanding). That means they need huge revenue and earnings growth to justify even their current stock prices.

We weigh and balance all of a company’s risk factors when recommending stocks. Our process demands a lot of judgment calls. We also sometimes recommend stocks despite the presence of one or more of these risks—such as Emerald Health Therapeutics (see above).

But, at the same time, it’s important for investors to keep aggressive stocks with a number of risk factors—like marijuana producers—to only a small part of their overall stock portfolios. And to show the best long-term results, we still think investors should stick with our three-part Successful Investor program:

  1. Hold mostly high-quality, dividend-paying stocks.
  2. Spread your money out across most if not all of the five main economic sectors: Manufacturing & Industry, Resources & Commodities, Consumer, Finance and Utilities.
  3. Downplay or stay out of stocks in the broker/media limelight.

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