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In the past 5 or 6 years, cannabis went from a buzzword to a billion-dollar industry.
Between 2014 and 2018, a multitude of cannabis companies went public in Canadian venture exchanges as well as in NYSE and NASDAQ, attracting billions in investments and opening the floodgates to an era of immense growth, media attention and investor excitement often called the “green rush”.
Late 2019 and early 2020 brought an overall loss of confidence from the investor front, prompted by an unfulfilled promise of profitability from many cannabis operators. The valuation of most public cannabis companies dropped, growth capital became harder to obtain and many companies were forced to make reductions and consolidate with others in order to navigate the bubble burst.
However, the COVID-19 pandemic showed that, while the initial flame of infatuation had pacified, the cannabis industry was here to stay. Facing social isolation measures, most jurisdictions with legal or medical programs declared cannabis an essential product, motivating a number analysts to grant the industry title of “recession-proof”.
Today, cannabis presents itself as a more established industry where expectations have become realistic. As rampant growth becomes secondary to profitability and positive balance sheets, many companies still present huge opportunities for investors of every kind.
Marijuana Stock Movers
Analyze marijuana stocks biggest gainers and losers before you invest.
While smaller companies have delivered astronomic returns (and losses) in the past few years, more established firms have performed steadily. Still, it’s hard to hash out the good companies. So, how can you tell the difference between a legit weed company and a good old pump-and-dump?
The Over-the-Counter Issue
While multiple states in the U.S. have legalized cannabis for either recreational or medical uses, marijuana is still illegal at the federal level. Of course, this had made it more difficult for most companies to get listed on a mainstream exchange.
Some cannabis business have sought alternative avenues to raise capital. Many businesses have gone public in Canadian exchanges, while others have done so by trading on over-the-counter U.S. exchanges.
This means that many publicly-traded cannabis companies are not subject to the same level of scrutiny that major exchanges and the SEC impose — although those trading on the TSX and CSE are subject to heavy scrutiny.
420 Investor Alan Brochstein seems to differ on this point. “It’s extremely important not to rely solely upon company press releases, as these are typically positive spins,” he says. “It takes a greater effort to read and comprehend the SEC filings, but the effort is worth it, as these give a more complete perspective of the fundamentals.
Take a look at Alan Brochstein’s 420 Investor course, where he shows you his real marijuana portfolio.
How to Hash out the Bad Weed Stocks
While it's always recommended that retail investors do their own due diligence, going over hundreds of filings and corporate documents can be hard and time-consuming. And you probably don’t have access to the resources needed to make an informed assessment of a company.
A safe option is to invest in Horizons Marijuana Life Sciences Index ETF and the ETFMG Alternative Harvest ETF. These instruments make it easy to invest in cannabis stocks that have already been pre-selected by teams of analysts who’ve conducted the necessary due diligence and decided to include certain companies in these ETFs.
Another option if you're looking to build out your own portfolios is to investment advisors and stock pickers like Alan Brochstein or Jeff Siegel of Green Chip Stocks.
How to Invest in Cannabis Stocks
Investing in cannabis is not limited to growers or retailers.
There are numerous companies providing support services to the industry. There are pharma and biotech companies that make cannabinoid-based drugs. And service and product providers that used to operate outside the marijuana industry have gotten on board since legalization.
The variety of companies that form the industry mean you have your choice of stocks or ETFs.
Step 1: Research the company.
Always start by researching the company or companies you’ll be investing in. Check SEC filings and other documents required by diverse regulatory agencies.
Read the latest news on these companies in site likes Yahoo Finance and Benzinga, and get a feel for the market sentiment using Twitter or Stocktwits.
Step 2: Determine the amount to invest.
As a rule of thumb, never invest more than you can afford to lose. While good research will often lead to strong returns, this will not necessarily be the case. Stocks are volatile and contingencies sometimes unpredictable.
In relation to this point, Brochstein says, “I find many people place too much confidence in just 1 or 2 ideas. In a start-up industry, which is what legal cannabis is in many ways, it’s not easy to pick the winners. If you go back to the late 1990s, a lot of the companies that many expected to be winners didn’t even survive three years. My longer-term focused model portfolios typically have a dozen names in them.”
Step 3: Decide on your timeline.
Deciding on when to buy and when to sell is crucial. Try and figure out what your thresholds are beforehand. So, for instance, establish a rule: “If the stock falls below X or surges above Y, I’ll sell.”
Step 4: Pick a broker.
Once you’ve gone through the initial steps, you’ll be ready to actually buy your shares. You can go old-school, with a brick and mortar broker like Scottrade or sign up for an online broker such as TradeStation or TD Ameritrade. Both options will allow you to buy and sell stocks once you’ve registered and funded your account.
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Step 5: Buy the stock.
This step may sound self-explanatory, but it’s a bit more complex than it seems.
“There are generally 2 types of ‘buy’ orders: market order and a limit order. A market order will execute the purchase at the present market price, while a limit order will only execute if the price falls at or below the limit price. Although a limit price might give an investor a lower price of entry, there is no guarantee that the limit order will execute,” Benzinga’s Thomas Rudy explains.
Step 6: Sell the stock.
Once you feel you’ve generated enough returns from a stock, it’ll be time to sell. Again, you can sell the stock with a market order or a limit order. Use your proceeds to reinvest or just spend them. Life is meant for living!
Step 7: Check out Benzinga’s extensive cannabis coverage.
Successful trading requires information and active engagement. What will help you achieve this? Benzinga’s Cannabis Newsdesk. Benzinga’s Cannabis Newsdesk will keep you up to date with the latest news on cannabis, hemp, and related businesses, as well as provide you with timely analysis of micro, macro and equity markets.
Trading Around a Core
A process that has helped Brochstein perform well in his model portfolios is what he calls “trading around a core." This strategy takes advantage of the inherent volatility in these stocks. You sell incrementally when the stocks are rallying or buy incrementally when the stocks are declining,” he explains.
“It’s important to make sure that the position deserves to be a holding, but if you are confident in the long-term prospects for the stock, varying your exposure can allow you to ‘buy the dip’ or ‘sell the rip’ and not get left on the sidelines or get buried if the stock moves higher after you trim your position or lower after you add to it.
To be real clear, if you go ‘all in’ on a stock and make it 50% of your portfolio, what are you going to do if it drops further? If you sell out of what you think is a great long-term holding because it has reached a level you didn’t expect, will you then be willing to pay more to buy it back in the future if it never falls?”