Understanding Pot Stocks

Part I.

After this past week, with news of high profile shorts like Altria (and Alphria and others) spreading and with IGC being delisted, I felt there was so much misinformation surrounding pot stocks that it was time to finally hop off the bench and write my first article on the topic. 

Because while some investors only focus on numbers, or hype, I think it’s important to focus on the psychology that drives consumers and the stock market. If you’re investing in pot stocks especially, it’s important to understand the psychology behind this industry. If you don’t understand the cannabis industry, how it operates and why consumers are even interested in cannabis, you’re going to have a hard time making the right calls financially.

What is cannabis?

Again, some investors don’t look at anything more than charts and numbers but I think it’s crucial, if you want to make money off pot stocks, to understand the industry you’re investing in. Especially since it’s cannabis. Because cannabis has been demonized and there’s a lot of misinformation and a total lack of understanding abound. Please understand though, when I say cannabis, I’m usually also including hemp. 

Cannabis is one of the most studied substances in the world. Decades ago, cannabis was a vital part of healing rituals, shaman medicine, and especially agriculture. It’s important to realize that before our government pushed prohibition on us (not out of public safety but for corporate interests), cannabis (and hemp) were utilized daily, with much success.

In fact, more and more research is proving that our bodies have an endocannabinoid system, and in order for our bodies to work correctly, we actually NEED cannabis: https://www.ncbi.nlm.nih.gov/m/pubmed/18404144/. So cannabis isn’t just something stoners smoke to get high, it’s something everyone needs for optimum health. And then there’s hemp, which could easily be a trillion dollar market all on it’s own. Think hempcrete, hemp biofuel, hemp clothing and this is all on top of the already multi billion dollar CBD market.

But while all of this sounds fantastic, and investors find it easy to get carried away due to all the hype, there’s a sobering reality here (pun intended!). We’re taking an illegal industry, with ties to cartels, organized crime, no real federal oversight, no banking protections and we’re trying to not only make the industry legal, we’re trying to mass market it. On top of normal growing pains any new industry faces, we’re also trying to rid the industry of the illegal business practices that came about because of prohibition.

The Different Types of Pot Stocks- 

Understanding that cannabusinesses will most likely still be partaking in some illegal business practices is key to making money off pot stocks. While in many ways this green rush is comparable to the tech boom in the early aughts, there’s a bit more risk involved.

While the majority of LPs (licensed producers) have cleaned up their act, the smaller cap stocks are more manipulated with less than savory motives. But again, understanding, and even accepting this, is key to successfully investing in this industry. 

Depending on your risk tolerance, there’s a wide variety of pot stocks to suit really any investing needs. I’ll break down the different types of pot stocks below-

Canadian LPs: 

I recommend licensed Canadian cannabis producers (LPs) to investors who are less tolerant to risk. Because Canada has already legalized cannabis, there’s obviously less risk involved. But there’s always going to be risk when you invest in the stock market, remember that. It’s about how you offset the risk (usually diversification) that’s important.

Canadian LPs are interesting because, in my opinion, many of these companies are more expensive than they should be. Because most pot stocks fall in the OTC market (I’ll explain in a second), any type of institutional investor/hedge fund money flowing in to cannabis, is only going to flow into a stock uplisted on an actual exchange (NYSE, TSE, etc). And institutional investors clearly want in. Usually when a pot stock uplists (think Tilray), the stock soars in price. 

So these LPs, like Aurora Cannabis or Canopy Growth, can get a tad expensive because of their popularity. Especially when you realize that Canada’s cannabis market is really only the size of California’s market. In order for any of these LPs to reach their current market cap (basically their valuation), they should be involved in a cannabis market besides simply Canada’s. This isn’t to say they’re not a worthy investment however. But I’ll go more into pricing later.

OTC Pot Stocks:

When companies don’t make the cut to list on an actual stock exchange, they’re listed as “over the counter” or pink sheet stocks. These stocks aren’t available on every platform, and they’re much riskier than regular stocks because there’s not much oversight. OTC stocks don’t have to adhere to the same strict guidelines as traditional stocks, like releasing financials, for instance. 

Remember though, we’re taking an illegal industry mainstream. If you work in the cannabis industry like I do, you know it’s not at all uncommon for cannabusinesses to have less than clear financials. Cannabis is still a federally illegal substance (in the US), many of these businesses have trouble even banking! So while some people question OTC pot stocks, being in the industry, it’s understandable to me why US cannabusinesses take a little longer to make it to an actual exchange. 

But people with less than savory motives can easily list a company OTC, claim it’s involved in cannabis, just to profit off investors. This is why due diligence is so important. These OTC stocks are also oftentimes heavily manipulated. They even put out their own paid press releases exaggerating their successes to “pump” the stock and make gains. So triple checking information is invaluable when you’re investing in these types of stocks.

Is it right this happens? That’s debatable. But outside these tricks and risks, there’s real money to be made. I truly believe OTC pots stocks especially, but pot stocks in general, offer anyone who’s interested a once in a lifetime opportunity. Unlike the tech boom, it’s now easier than ever for ordinary people to pick up a device with WiFi, and buy shares of a cannabis company.

I’m of the belief that learning how to invest and eventually trade pot stocks could be key in helping Americans get out from under the near poverty many of us are living in. And pot stocks are so incredibly cheap in comparison to most other stocks (100 shares of Aurora Cannabis will cost you about $600, while 100 shares of Amazon will cost you $170,000!). So all you need is a few hundred dollars to get started. The barrier to entry is minimal. And the rewards could be quite lucrative as cannabis is already the fastest growing industry in the US, and it’s not even LEGAL yet! 

I don’t want this to be too long, so I’ll focus more on why this is a once in a lifetime opportunity in my second installment. I’ll go further in depth on the psychology of the market (and consumers), especially now, as tech stocks disastrously weigh down the market and we all come dangerously close to a recession. Cannabis is actually perfectly positioned to be a lifeline to many, and that’s what makes it an incredible investment opportunity. I’m also going to continue to break down the two other types of pot stocks available for investment. 

And I’m going to go slightly more in depth on the pricing of different pot stocks, and the amount of risk that should be calculated in before you decide to invest. I’ll also broach diversification. If you have any questions, leave them below or message me and I might even write up a Q&A of the most asked questions regarding investing in general and/or pot stocks.

Thanks for reading and make sure to follow me so you know when the second installment drops!!

Follow @BabeTrader on Instagram and Snapchat for live stock market predictions and advice on pot stocks. I’m also documenting my journey as I build a cannabis influencer brand and navigate the burgeoning cannabis industry!