Opinion: Should You Invest in Cannabis (Marijuana) Stocks?

Interest in cannabis stocks, otherwise known as pot or marijuana stocks is growing and this is being fuelled by the ever-increasing demand for cannabis products. In Australia, Cannabis stocks are still a controversial topic, however some investors are acutely aware that this area is in the early stages of growth, and this means potential for significant capital growth in stock prices. Given this, investors are keen to know more about the opportunities and the risks of investing in this space.

Is now the time to buy Cannabis stocks?

To understand this, first we need to look at the big picture as to what the forecasts are for this market?

Forecasts indicate that by 2025 the US is likely to spend around $30 billion on legal cannabis and Asia is forecast to experience significant growth in demand for Cannabis products as well. More locally, in early 2021 the sale of low dose Cannabidiol or CBD without a prescription was approved by the Australian Therapeutic Goods Administration (TGA), leaving some investors asking if this is the time to be investing in Cannabis stocks?

While there is quite a lot happening in this space you have to consider if investing in Cannabis stocks is right for you.

Related article: Opinion: How to choose what stocks to buy

Are Cannabis stocks for you?

It is important to start by saying that given this industry is still in its embryonic stage an investment in Cannabis stocks will not be for everyone. Investors with a high-risk profile would generally be aware of the significant level of volatility on stocks where liquidity is on the low end of the scale. This goes hand in hand with owning stocks in start-up areas such as the Cannabis market.
Investors who are not comfortable with volatility where significant swings in price are normal should avoid speculative type stocks including those in this area.

It was not too long ago that the first Cannabis stock was listed on the Australian market to some interesting reactions. Some investors didn’t take it seriously with some telling me they thought it would be fun to invest a little in a Cannabis stock. Not a wise investing strategy.

The simple rule all investors can apply when investing in any stock is, the amount you invest is not a reason for ignoring risk. Regardless of the level of investment you should always apply sound money and risk management principles to any purchase, including setting a stop loss.

Some of these stocks have the potential to rise considerably which is why investors are attracted to them, however at times stocks in these emerging markets will fall heavily ending up at a fraction of the purchase price, and so buying and indeed holding on to them can create bad habits that can set people up for considerable loss.

While carefully selected cannabis stocks can at times provide significant capital growth they may be better suited to traders looking for short term gains.

Shares in general are considered a risky investment product, therefore you may want to seek the advice of a professional financial advisor.

Cannabis ETFs

While investing in an ETF removes the specific risk that exists when investing in one stock, as you will have a broader selection of stocks within an ETF, the risk in this developing area remains significant for investors. ETFs have a place, however, the concern is that ETFs can make investors complacent when they need to be active in managing risk. This is just one reason why we prefer investors learn how to directly invest in stocks first.

Cannabis stocks you may want to explore

For those traders who are educated in how to apply proper rules to manage risk in the market and have experience trading stocks there are a couple of cannabis stocks below that you may want to consider for your watch list, if they suit your portfolio criteria and goals.

Incannex Healthcare (IHL) develops medicinal cannabinoid pharmaceutical products and is capable of exporting globally. While IHL continues to hold up well above $0.30 the stock has the potential to continue the current run up to between $0.50 and $0.60 in 2021. If IHL trades strongly below $0.30 the risk of a further fall would be high.

ECofibre (EOF) plans to be the global leader in hemp technologies and aims to own and control the most attractive and sustainable parts of the value chain selling hemp based products. The share price fell to a low of $0.475 in May 2021 and has since commenced what appears to be a recovery while trading close to $0.85. If buyer support increases it may soon trade strongly back above $1.

Many of the other Australian stocks such as Cann Group (CAN), Botanix Pharmaceuticals (BOT), Althea Group (AGH), Zelira Therapeutics (ZLD) and Little Green Pharma (LGP) have either been trading down or are struggling to bounce off lows. For many investors this may mean they are sitting on a significant loss. Given the risks, it is important that investors consider carefully whether an investment in this area is appropriate for them.

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