A good example of all-round words of caution for investors comes from Marketwatch.com, and it’s a mix of conventional wisdom, some cynicism and definite skepticism regarding the massive hype.
Recreational cannabis is the main target, and the warnings are based on a potpourri (old joke) of distrust, as much as genuine doubts about investor values.
The sum of the various warnings about cannabis investment read like the vast stream of news headlines on the subject:
• Compliance with Federal US laws, under which cannabis is still illegal, is still a problem. That problem is definitely not going to be changing with a conservative administration.
• Big money pouring into cannabis stocks is distorting the market. Everyone’s getting on board, which is driving prices up.
• Investment market neuroses. A cannabis ETF (Exchange Traded Fund), Alternative Harvest, has crashed twice between 2018 and 2019, in buy and sell patterns which definitely look like speculative (some might say dubious) investment.
• Valuations issues. Current valuations are all over the place, which indicates both opportunism and a real lack of ability for investors to make accurate assessments of stocks.
• Skepticism in high places. PwC (PriceWaterhouseCoopers) is spectacularly unimpressed with the methods used to value, which are a mix of “enterprise value” (market capital minus debt), gross revenue and price/earnings ratio. This, say the experts, is virtually meaningless in real business terms, and it’s hard to argue. It’s definitely not a clear picture.
Er, um, but….?
The basic tenets of market caution are actually pretty right, but only for the scatterbrained/ politically handicapped US market, which has yet to get its act together. Elsewhere, cannabis is booming as a recreational and medical product, and the revenue is real enough.
There are many other factors which may impact down the track:
• Medical patents
• Value of cannabis derived products, like terpenes, of which cannabis is literally full of the things.
• Recreational market development, which seems to be rattling along.
• Market efficiencies, reducing production and handling costs along the supply chain and improving profitability
Any of these points can and will be worth billions for someone, sooner or later. Picking a winner for investment, however, is unlikely to be any easier.
Market perceptions, and other hazards
There’s another issue, which is almost too obvious, but not usually understood. The investment market tends to be at a serious disadvantage with new products and new markets.
Technology stocks were a case in point. Facebook’s initial public offering, and the market’s various reactions to Facebook news, were and are absolutely typical, and predictable.
The “tech boom” was a bubble, and cannabis is likely to see the same investment highs and lows, based on any information which drifts in to market perceptions. The investment market is famous for overselling both ways, and a pretty bumpy ride can be safely predicted for most cannabis stocks.
Until the products, revenue sources and performance of the cannabis companies can be properly evaluated, however, the caution is well justified. Trusting the market can be as counterproductive as trusting the hype.
Suggestions:
Get in to your investments with a safe, credible risk margin. There’s no need to overcommit and jump off cliffs, or take unwarranted risks with your investment capital.
Watch the market’s overreactions, both ways. Bargains will show up, but stay in risk management mode.
Good performers will emerge. Good revenue, good products, good intellectual property assets, the real value will be in the real business.
