As many penny stock traders and investors already know, “legalized” marijuana is now one of world’s quickest growing industries, with many marijuana stocks still up better than 100% over their previous year’s earnings.
Legal marijuana sales increased 34% in North American in 2016, and a compounded annual growth rate of 26% forecasted through 2021 projects to a market that could reach $22 billion. An underlying factor in this parabolic sales growth is a major shift in the way the public views marijuana, and the increase of pressure on Washington lawmakers to consider rescheduling the drug or risk losing their re-election.
But are marijuana penny stocks stocks safe to invest in? The majority of marijuana stocks are currently listed on the over the counter (OTC) stock exchanges. Penny stock investing, typically defined as investing in stocks that are trading under $5 a share and/or a market cap below $200 million, can be very profitable, but also very risky. While OTC reporting standards have improved, it still can be difficult to get important, updated financial information from some Pink Sheet listed marijuana companies, and many could also have higher liquidity risk .
Another major risk of investing or trading in marijuana penny stocks is that cannabis still is not legal. Although approved on the state level in 29 US States for medicinal use, and a handful more approving recreational marijuana use, cannabis is still illegal on the Federal level.img src courtesy of http://www.governing.com
While cannabis is legal for medical uses in Canada, Mexico and a small handful of other countries around the world, the chances of the Unites States legalizing marijuana for either medicinal or recreational use are currently slim at best. U.S. Attorney General Jeff Sessions is a longtime opponent of marijuana legalization. Sessions said in a September, 2017 article in Forbes magazine, “I’ve never felt that we should legalize marijuana, it doesn’t strike me that the country would be better if it’s being sold on every street corner. We do know that legalization results in greater use…Federal law remains in effect.” The bottom line, at least for now, is that U.S. marijuana growers still face the possibility of a crackdown by the Federal government.
Another factor to consider whether or not to invest in pot stocks is that most marijuana companies lose money. Many U.S. marijuana businesses lack access to banking services and are unable to procure business loans or lines of credit, and in some cases can’t even open a business bank account. They also can’t take income tax deductions, because U.S. tax code 280E does not allow businesses that sell a federally illegal substance to take normal corporate income tax deductions, so most cannabis businesses have to pay tax on their gross profits instead of net profits.
Finally, the weed industry is highly fragmented with a lot of competition. With a lot of publicly traded newcomers entering the market lacking long term experience, there is bound to be mounting losses for many marijuana stocks.
While some penny stocks in the marijuana industry could still be very profitable in the future, broader market success stories are probably less likely. Many marijuana investors appear to be more emotional, momentum driven traders, sucked into the euphoric marijuana high of investing in pot stocks, which could easily come back to bite them if stocks in marijuana companies continue to lose money, or even more importantly, if the U.S. Federal Government finally decides to crack down on the state wide use of the herb for either recreational or medicinal use.
With current marijuana sales projections so high, it might be well worth the risk to trade or invest in marijuana penny stocks. But if you think the risk is too high, an alternative to buying stock in companies that only offer marijuana products or some other specific aspect of the market, may be to look for reputable, established companies that are adding marijuana products to their focus, or to research stock in industries related to marijuana growing such as cannabis fertilizer, pesticides and other related pharmaceutical companies, And, don’t forget to always use stop loss orders, as investing in any cannabis related business can always be risky.
Subscribe to the PennyPicks Penny Stock Alert Newsletter and receive timely penny stock profiles directly to your inbox before the market opens