Marijuana has the potential to become the next big thing. It is for this reason that investors at nearly every level are now throwing money at any cannabis company with a pulse in hopes of cashing in when this thing, whatever it is destined to become, finally matures. But the hysteria over highs is fueling an obsession over pot stocks that is reminiscent of the dot-com boom, whereby speculative investments — sinking money into the next big thing — have seduced outsiders and lower-tier investors. Some investors will inevitably come out on top, while history shows that others are doomed to take it on the chin.
All it takes is a little news, like Coca-Cola is in talks with Aurora Cannabis about bringing a new CBD-infused beverage to market, and investors go buck wild. Reports show that the stock for this cannabis firm rose 18 percent after the Coke announcement was made last week — this in spite of the fact that there is no deal currently in place. Canadian-based Tilray is another pot company that has experienced a surge of investments recently after it was revealed that it would supply U.S. researchers with medical marijuana. The stock seemed like a logical buy for most investors since it is almost impossible to get this type of permission from the federal government. Tilray’s stock was strong for a few days, but a push by U.S. Representative Matt Gaetz to give the contract to a U.S. cannabis firm instead caused it to plummet by almost $200 by the end of the week.
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All of the buzz surrounding cannabis investments really took off last year after Constellation Brands, maker of the Corona beer brand, made a modest $200 million investment with Canopy Growth in hopes of creating a cannabis-infused beverage. The company gave investors more to think about over the summer when it poured another $4 billion into the project. Since then, companies like Molson Coors have signed similar deals. There are also rumors floating around that Anheuser-Busch and Diageo Plc are working on similar deals. And you had better believe investors are just waiting for these companies to make a move.
Although the cannabis industry has the makings of a mega-industry, the stability of the market is really contingent on what happens here in the United States. Right now, the federal government considers marijuana a Schedule I dangerous drug with no known medicinal application. This makes it difficult for U.S cannabis companies to get listed on Nasdaq and it also proves challenging when it comes to getting listed on Canadian markets.
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Pot stocks would be better served if the U.S. government would legalize nationwide, just like Canada. But until then, there are too many unknown variable to make it a safe bet for investors.
It is important for investors to understand, especially those who are just now getting into the market because of their love of cannabis, that pot stocks are grossly overvalued. Some of them so much that they can appear to be a better buy than some of the most solid companies on the S&P 500. But as a recent article from Forbes points out, this is just an illusion. It goes on to suggest that purchasing shares of Apple is still a better long-term investment strategy than buying any stock associated with the cannabis trade.