Market Overview

The Marijuana Stock Trap


Are marijuana-related stocks in a bubble?  Well, if you consider a business valued at nearly a billion dollars with tens of millions in losses, no revenues on the horizon, and tens of millions in debt to be a bubble, then yes.

Sure, legalized marijuana is a great idea according to proponents.  The crime rates have dropped pretty significantly, according to the Colorado Department of Public Safety, while the Associated Press has claimed new revenues from taxation could run as high as $124 million.  This is not to mention the "benefits" among the users.

And yes, this is a relatively new and growing trend with tremendous growth ahead.  That does not mean, however, that you should dump all grandma's money into any company with the word "hemp" or "cannabis" in the name.  Unfortunately, as history has shown us time and again, that is exactly what people will do.  And they still are right now.

Whether you are talking about the Dutch Tulip Bulb mania of 1637, the California gold rush, or the dot com craze of 1999, all bubbles burst.  An unfortunate fact is that when the assets fall back down towards realistic levels, most player involved get burned.  This is setting up to happen again, and this time there will be some pretty big losses among less-sophisticated yet optimistic investors.
While my legal team has begged me not to name names, you could pick out just about any marijuana-related stock to find an over-valued investment.  The concept of legalized marijuana holds a great deal of promise for the underlying businesses, while the topic has been at the front and center of news coverage lately.  These factors combine with the desire among less experienced investors to turn a small investment into a fortune.  As the money flows into these formerly tiny penny stock companies, the shares rocket higher.
This increase in price creates a self-reinforcing, self-inflating bubble, whereby the higher the price of these stocks go, the greater the mania.  If a dollar is made, five more file in behind it.  When ten dollars is made, suddenly fifty more get in line.
This will continue to drive the prices of the underlying stocks higher... until it doesn't.  Eventually investors start to realize that their wonderful investment is little more than a husband and wife team making toe-rings out of hemp.  Suddenly the market capitalization of a half a billion dollars suddenly starts to look a little steep.
Reality and sanity always show up eventually, and their favorite thing to do is burst bubbles.  Unfortunately for tens of thousands of investors, they are about to get burned.  The way to make money from these marijuana-related penny stocks is to buy them a couple of years ago when no one was paying attention.  The way to lose a big chunk of change?  Buy them now.

The preceding article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.


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