Is Now The Time For Cannabis Stocks?

Jimmy Butts's picture

Thursday, October 11, 2018 - 12:00am

by Jimmy Butts

I've avoided the topic and industry for a while now. But there's no denying that it's a burgeoning space with considerable momentum. One that I get plenty of questions about...

I'm talking about the cannabis market, or pot stocks.

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Pot stocks have been a hot topic for years now, but investing in the industry has been volatile and tricky. That's because there are more than 600 cannabis stocks being traded. Most of those stocks trade over-the-counter (OTC), a market that is lightly-regulated and has limited access to capital.

To make it worse, the vast majority of these companies will likely disappear. Many are fly-by-night firms with no sales or earnings. Investors in this space might see dramatic gains in a short amount of time, only to watch them vanish in a matter of days.

The penny pot stock, MyDX (OTC: MYDX), for instance, lost 99% of its value over the last couple of years... even as the cannabis industry has surged.

Then there's the clinical-stage cannabinoid (CBD)-based drug developer Zynerba Pharmaceuticals (Nasdaq: ZYNE). Zynerba's shares tumbled 70% since their April 2017 highs.

These are only two examples in the long list of failed pot stocks.

Now don't get me wrong, there is opportunity in the cannabis industry and plenty of pot stocks have seen their shares rise by thousands of percent.

A Wild, Crazy Ride...
The cannabis industry has also been in the spotlight recently because we're nearing October 17... this is the day in which recreational marijuana will officially become legal in Canada. Our neighbors to the north will become only the second country in the world to legalize the drug (Uruguay legalized it in December 2013).

Shares of Canadian marijuana producer Tilray (Nasdaq: TLRY) have been in the spotlight recently as shares have been on a wild ride. For instance, on September 4 shares traded at $77 each. Nine days later they closed at $119.76, (a 56% increase). Just six days after that (on September 19), shares closed at $214.06. So, in a short three weeks, shares of Tilray climbed 180%, pushing its market cap over $18 billion.

Keep in mind that Heico has annual sales of more than $1.2 billion compared with Tilray's annual sales of $28 million.
What's perhaps even crazier is that on September 19, shares swung from an intraday low of $151 to an intraday high of $300. That's a nearly 100% swing in a single day. The stock was even halted five times for volatility. (Shares have since fallen to around $141.)

Welcome to the world of pot-stock investing.

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Do Pot Stocks Pass the MP Test?
Like I mentioned before, there is opportunity in this space and there is considerable momentum behind it. Now, you might be wondering how some of these firms rate according to my proprietary Maximum Profit system.

I ran three of the more established companies with ties to the marijuana industry through my system. Keep in mind that I needed at least six months' worth of trading data and validated financials. (Tilray went public in July so I excluded it).

Three of the major pot stock names (Canopy, Cronos, GW Pharma) all pass the first trigger of the MP Score (which is based on momentum), but they fail miserably when it comes to the second trigger (which is based on fundamentals).

The simple fact is, none of these companies produces (or has produced in the last three years) positive cash flow. It's hard to invest in a company that doesn't make money. And not only that, but it's hard to invest in a company that's not projected to make money in the near future.

If You Really Want To Take A Flier, Do This...
I know there's considerable interest in this space. I get questions from friends and family on a near daily basis asking which pot stocks are my favorite. And I'll tell you exactly what I tell them...

It's a tough space, but if you want to take a flier on pot stocks then I'd go with the ones that other companies are investing in. For example, Constellation Brands (NYSE: STZ) just invested $4 billion into Canopy Growth Company (NYSE: CGC). Coca-Cola (NYSE: KO) is reportedly in talks with Aurora Cannabis (OTC: ACBFF) about producing infused soft drinks. Molson Coors (NYSE: TAP) has tapped Hydropothecary Corp. (OTC: HYYWF) as its weed partner.

Then there is ETFMG Alternative Harvest ETF (NYSE: MJ), an exchange-traded fund that holds all of these companies and then some, if you're looking for more of a one-stop shop into the pot industry. Regardless of which stock you choose, or if you even decide to venture into this space, wait for a big down day to buy. And as volatile as this industry has been, you probably needn't wait long.

There's A Better Way To Invest
Now, I don't have any pot stocks that I'll be adding to the Maximum Profit portfolio, but our system is finding winning picks each and every month -- and without the worry that comes along with buying into a risky space like pot stocks.

If you're tired of not knowing only what to buy, but when to buy and sell, then you should give the Maximum Profit system a try. It just might be the best investment decision you make all year. We've found gains of 135%, 181%, 242% and more using this system -- but perhaps ever more important, it's steered us away from the market when it hits rough waters. To learn more about the MP Score, check out this report.

Jimmy Butts does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.