So what were you thinking, getting into these high-beta stocks? If you’re not familiar with the term “high-beta,” it refers to stocks that are expected to be more volatile than the average. Of course, given the sell-offs we’ve been seeing across the broader market, such a term might not mean much at all in our current environment.
Regardless, cannabis stocks (like any other) are driven partly by two kinds of participants: momentum traders and investors (and within the latter, you have the “smart money” and the “don’t-know-what-I’m-doing money”). Which one are you?
According to analyst Arora Nigam, we see lots of momentum selling countered by just a little bit of smart money buying every time these stocks dip. Of course, given the volatile nature of these stocks, and the highly disruptive industry they represent, what else can we expect from these two classes of participants? Again, which one are you? I ask this twice because many investors or traders may not be able to answer this question, which brings us back to the first question: why are you investing in these high-beta stocks?
Other analysts attribute the steep decline to profit taking and from the fact that large cannabis industry conferences plus Canada’s Oct 17 legalization date may have caused many of the stocks to be bid up, possibly well above “standard” valuations. But how reliable are those measures and valuations? Many experts have note that standard fundamental measures–price-to-earnings, price-to-book, and price-to-sales–were already overvalued prior to the rise that many of these stocks have exhibited. As an investor, don’t say that you didn’t already know this.
One trader, as quoted on CNBC, notes that perhaps investors may be “raising cash before the launch of three big US-based cannabis companies on Canadian stock exchanges” within the next month (one of these companies being Acreage Holdings). Could it be true? It’s impossible to tell.
So is it time to dump your cannabis stocks? It depends on the kind of investor/trader you are. A couple of things to consider: if Canada’s recreational cannabis sales exceed $4 billion next year as some analysts predict, that would be a sextuple increase from its sales in 2017 (should it materialize). Currently, the global cannabis market is worth $150 billion, and in the US alone (which is still at its nascent stages), that figure is $50 billion. Constellation Brands expects the global figure to reach $200 billion by 2033.
Emerging, speculative, and highly volatile, the cannabis industry requires some hard thinking…and steely intestinal fortitude.
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