Marijuana—or cannabis, to use the all-encompassing term—is the fastest-growing industry in America. Marijuana stocks are growing even faster.
It’s not hard to understand why. Canada has legalized the drug nationally, and since the switch in that country was flipped, companies in Canada have been struggling to find enough marijuana supply for the booming legal market.
Here in the U.S., federal marijuana law hasn’t changed yet, but state by state, legalization is progressing, and hemp is now legal nationwide, which has been a boon to the CBD industry.
It’s easy to want to dive in and buy, but when evaluating marijuana stocks, I like to use four principal factors:
Growth is first. If a company isn’t growing revenues at a very good pace, it doesn’t warrant my attention. Business is booming, so if a prospect is not growing revenues at a rate of at least 100%, I probably won’t consider it.
Story is second. I need to see a story that tells me 1) that this company can grow fast and become one of the long-term winners in the industry or 2) that this company, while it isn’t growing fast, has a rock-solid defensive position that will enable its stock to resist the occasional big correction in the sector.
Chart is third on this list, though it could easily be first. The movement of the chart reflects everything that investors know about the company and its prospects, so if the chart doesn’t tell me that investors’ perceptions of the company are improving, I’m not buying, regardless of the story.
Value is definitely last in this list when it comes to marijuana stocks. These companies are growing so fast—and so few have real earnings—that traditional valuation metrics are next to useless. So I look at relative valuations in the group, looking at the price/sales ratio (PSR) of each stock, and that has been helpful.
I suggest investing in smaller, less-popular stocks that are going up. Some of these are Canadian companies, some are headquartered in the U.S., but all of them are growing fast and the majority are still not as popular (overvalued) as the big Canadian producers.