Marijuana is the fastest-growing industry in America, growing at a rate of 32% in the latest year.
It’s not hard to understand why.
First, existing users are shifting from the black market to the legal market, where they’re developing bonds with brands, just as people do with cigarettes and alcohol.
Second, the growing acceptance of marijuana in society means people who didn’t use it before are trying it, frequently as a way to address health issues, from pain to depression to insomnia.
And here I’m not just talking about marijuana but also cannabidiol (CBD), the component in cannabis that has therapeutic effects but no psychoactive effects; it doesn’t get you high.
Even Martha Stewart joined the parade, announcing that she’d teamed up with industry leader Canopy Brands in a project to develop CBD products for both humans and their pets.
So it’s very clear to me that the cannabis industry is not just here to stay—it’s going to be a major industry, on par with alcohol and cigarettes, both of which, incidentally, are more harmful than marijuana.
If you’re a growth investor, you can’t afford not to be in this sector. But how do you know what marijuana stocks to buy – particularly coming off a very rough year for the sector?
The Biggest Marijuana Stocks: Canopy Growth (CGC) and Cronos (CRON)
Well, the easiest thing to do is to buy the biggest stocks in the industry, Canopy Growth (CGC) and Cronos (CRON). Trouble is, that’s what everyone else has been doing, not least Constellation Brands (STZ), which has bought 38% of Canopy; and Altria (MO), which is buying 45% of Cronos.
As a result, the valuations of these two companies—here I’m looking at price-to-sales ratios, simply because there are no earnings—are sky-high. Now, it’s entirely possible that these valuations will stay high for a long time; the simple fact that new investors are coming into the sector every day means demand for quality marijuana stocks exceeds supply and that can continue to keep these stocks at lofty valuations for a very long time.
However, I’ve always found that you can do better by going where other investors aren’t, and in this case that means smaller companies that aren’t as well known.
Make More Money in Up Markets
The biggest reason my readers have outperformed the index is simple: we’ve been invested in smaller, less-popular stocks. Some of these are Canadian companies, some are headquartered in the U.S., but all of them are growing fast; in fact, the average revenue growth of these companies in the latest reported quarter was a red-hot 291% from the year-before quarter.
And these companies are still not as popular as Canopy and Cronos!
Lose Less Money in Down Markets
Of course, the last year hasn’t been kind to marijuana stocks. There’s been a lot of turbulence, and I’ve had to make a number of adjustments to my portfolio.
By leaning against the wind (by taking partial profits and raising cash), my readers have lost less money than the averages. Indeed, as of this writing, my marijuana advisory stocks have an average gain of 62%, despite a whopping 46% drop in the sector through the first three months of 2020.
If you’re just starting out investing in the marijuana sector, with marijuana stocks at overly depressed valuations, it’s a great time to buy. But you have to know which stocks to buy, and how to invest in the cannabis sector. For you, I have three simple rules.
Three Rules for Investing in Marijuana Stocks
Diversification is the most important rule of investing, and always has been, because it reduces the pain from any one bad performer. But you don’t want to over-diversify; if you do that, you might as well buy an ETF, and that’s a guarantee of average performance—minus fees, of course.
2. Buy on Corrections
In this volatile sector, where many of the stocks are low-priced, it pays to wait for corrections. Used properly, volatility can be your friend. I’d say what’s happened in the sector over the last year qualifies as a correction. A rebound is coming. Soon.
3. Take Partial Profits When Stocks are High
Conversely, I often recommend taking partial profits when stocks get too extended, or when a position gets overly large. Both these factors increase risk, and I like to help my readers decrease risk whenever possible, as long as it doesn’t reduce their long-term profit potential.
I published my first issue of the advisory in August 2017, when the marijuana sector was stone cold, but I was convinced much better times were ahead.
Three months later, of the 10 stocks I recommended, the average stock was up 32%—with the best up 131%!
And on January 8, 2018, a week after marijuana became legal in California, the stocks were red-hot and the average profit in the portfolio was 168%.
I was feeling good!
But I also knew that the straight-up move couldn’t continue; I’ve seen too many similar peaks over the decades.
So I immediately sent my readers a special update, saying:
“My general advice is this: traders should take profits now—especially in the most extended stocks—and plan to get back on board when heads are cooler and risks much lower. Or, if you don’t sell now, at least use a trailing stop, either real or mental.
“Investors, assuming you invested no more than 10% of your assets in the sector, as I originally recommended, can take partial profits in the biggest gainers and then sit tight. Somewhere ahead is a pause, a base or a serious correction, and I want you to be able to hold your best stocks through it.”
Well, the marijuana sector peaked the very next day, and a month later, the North American Marijuana Index was down 37%, with many of the previously hot stocks faring far worse.
Why did it peak? Because buyers ran out of ammunition. Because values were silly. Because traders saw opportunity to take profits.
And all of this is normal for a hot new sector.
In the phase of growing excitement, new money rolls in and demand exceeds supply and values get silly.
In the topping phase, sane heads take profits and sell to the last buyers.
Fortunately, that top is well in the rear-view mirror, and marijuana stocks are only just beginning to recover. And yet, the seven stocks in my marijuana portfolio are performing far better. That bodes well for the coming months, as we appear to be putting in a bottom. Long term, the current prices look even more attractive, as we’re still in the early stages of a long marijuana stock rally.
Good or bad, I’ll be following it every step of the way through this booming, volatile industry.