Watch out for these two marijuana stock ‘wariness factors’

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Investment Outlook

You need to understand the risks when investing in cannabis stocks and how to mitigate the resulting risk to your portfolio. Our three-part Successful Investor approach focuses on helping you limit exposure to the industry’s most-aggressive stocks.


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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.

Today’s soaring share prices for 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.

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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