5 FAQs About Medical Marijuana Stocks To Buy

things to know before investing in medical marijuana
Patricia Patterson By Patricia Patterson | Editor

Marijuana Stocks: Hot As Firecrackers Lately

Marijuana is the largest cash crop within the U.S. Over the past few years, it has enjoyed a 77% growth rate, and by 2018 the estimated growth rate is expected to be 700%. It is larger than wheat, cotton, and corn! According to data from the UN, it has an estimated value of around $142 billion. Just to put this in perspective, one of the world's most valuable commodities is coffee, and the global coffee market has an annual value of around $80 billion.

Marijuana is definitely not just an underground drug any longer that can be purchased only from criminals on street corners, and is instead a viable industry now that is making an absolute fortune for investors. Medical marijuana stocks to buy have been as hot as firecrackers lately. As one state after another continues to vote to legalize medical marijuana (and in some states recreational marijuana as well), money has continued to flow into the fledgling industry. However, is it time for selling marijuana stocks now? The following are two compelling reasons for selling, in addition to one why you shouldn't sell right now.

things to know before investing in medical marijuana

1How Are Marijuana Stocks Performing?

When stock prices are skyrocketing over a brief period of time to a level that is well beyond realistic valuations for the companies in question, what do we call this type of scenario? Give yourself a friendly pat on the back if you said bubble.

It isn't too hard to make the argument that marijuana stocks have been following a typical pattern that a stock bubble shows. Over the last 12 months, the share price for Canopy Growth Corporation (NASDAQOTH: TWMJF) increased over 220%. During this same period, the stock of Medical Marijuana Inc. (NASDAQOTH: MJNA) tripled. Over the past 12 months, the shares of Aurora Cannabis (NASDAQOTH: ACBFF) have skyrocketed by over 350%.

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2Will Marijuana Outperform Other Stocks In The Future?

Opportunity cost is one of the least noticed but most significant costs that is associated with investing. Each dollar that you invest in one stock is one dollar that you could have invested in a different stock that may have earned a higher return. Over the last few years, it is true that not many stocks have been able to generate the kinds of returns that have been earned by marijuana stocks. However, marijuana stocks have been the big thing already, so they aren't the next hot thing. There isn't any guarantee that in the future, the stocks will be able to outperform other kinds of stocks.

Canopy Growth is at least profitable. Last year Medical Marijuana had $8 million in revenue and lost $25.9 million, and Aurora Cannabis had almost $7 million in revenue over the final two quarters of 2016 and lost $5.6 million. So what happens to a bubble? It bursts, sooner or later. It is a much better idea to sell before this occurs than after it happens.

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3Are The Rewards Worth The Associated Risks?

If you believe the risk-reward profile for owning a certain marijuana stock is more favorable compared to owning other stocks, then you should definitely keep it. That viewpoint might be appropriate for some marijuana stocks. The best example of this is probably GW Pharmaceuticals (NASDAQ: GWPH). This stock is trading at an incredible 272 times sale; therefore, GW definitely isn't a bargain purchase based on its prior performance. However, if the company's Epidiolex product were to gain regulatory approval, then some analysts believe that annual sales of as much as $3 billion could be reached by the cannabinoid drug.

GW's stock could go much higher if the drug's actual sales are anywhere close to the ballpark of this projection. Of course, there are risks. Sales could end up being a lot lower compared to what is being projected by some analysts. However, I don't believe it is unrealistic for the potential outcomes on GW Pharmaceuticals stock to be evaluated by an investor and determine that the potential risks are more than made up for by the potential gains.

things to know before investing in medical marijuana

4Are These Businesses Actually Worth That Much?

The phenomenal growth has resulted in the market cap of Canopy Growth standing at $1.1 billion. The market cap of Medical Marijuana is nearly $300 million. The value of Aurora Cannabis is close to $650 million. But are these business actually worth that much? The answer is, no.

Over the past nine months of 2016 Canopy growth earned $25.2 million in revenue and earnings of $6.8 million. What that means is that on an annualized basis, the stock is trading at almost 72 times earnings and 19 times sales. Astronomical is the only word that can be used to describe the valuation of Canopy.

 is medical marijuana worth investing in

5Should You Sell?

Determining whether to sell a marijuana stock or not, you should use the same kind of decision-making process that is used when you should sell any stock. Current valuations should definitely be looked at by what growth prospects are realistic. Also look into what other investment opportunities might be available. Consider the potential rewards versus the potential risks.

It may very well be possible that there are some medical marijuana stocks to buy that you should actually sell, and others might be worth keeping. No matter what you decide to do, make sure you don't hold onto a stock due to being hot at some point in past. Keep in mind the disclaimer from mutual funds: past performance isn't always indicative of what future results might be.

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