Marijuana related stocks have been surging lately because a lot of people believe cannabis will be legalized in the United States soon. But the sector has many of the hallmarks of a speculative bubble, and probably needs a major shakeout before the average investor should consider adding marijuana to a portfolio.
“Cannabis stocks are a fad,” said George Boyan, president of Leumi Investment Services. “Who knows where the market will go? And the problem with speculative investments? They all have an expiration date.”
Think of all the e-commerce companies that went public in the late 1990s not named Amazon (AMZN). Most of them are now gone.
That’s not to say that the business of cannabis is doomed to fail. Some companies will probably make big bucks from selling recreational and medical marijuana.
Mergers could help the market mature, but we’re still waiting for some consolidation to take place.
Aphria (APHA), a Canadian marijuana grower, this week rejected a hostile takeover bid from rival Green Growth Brands (GGBXF), for example.
More giant consumer companies need to invest in the sector, too. There’s constant speculation about the likes of Coke (KO) and Pepsi (PEP) eventually getting into the business if marijuana is ever legalized by the federal government.
Some big business support has arrived.
Tilray (TLRY) has a deal with Novartis (NVS)-owned Sandoz to work on medical cannabis products in Canada and other countries where cannabis is already legal.
Cronos (CRON), a company that now has the backing of tobacco giant Altria (MO), has more than doubled already this year.
Canopy Growth (CGC), which has a $4 billion investment from Corona owner Constellation Brands (STZ), is up 75% so far in 2019.
It’s also encouraging to see more Wall Street firms covering the industry. It helps legitimize the sector.
But there are too many “ifs” and “whens” to make investing in cannabis a safe bet anytime soon.
Shares of New Age Beverages (NBEV), Pyxus (PYX) and Charlotte’s Web (CWBHF), which all sell products with hemp and cannabidiol (CBD) were lifted by the passage of Farm Bill in Congress last year that legalized industrial production of hemp.
But now those companies have a regulation problem.
The Food and Drug Administration said after the bill’s passage that it planned to enforce a policy of not approving CBD for food and beverages, but to look into ways to bring those products to market in a legal way.
New York City began cracking down this week on CBD-based drinks and food in restaurants, citing health concerns.
