The latest frenzy is all about marijuana and pot. With growing investor interest happening in the cannabis and hemp industry, penny stocks in the sector has been booming. The anticipation of full legalization in Canada and several U.S. states as well as the shifting consumer opinion have caused these pot stocks to surge ahead.
According to cannabis research firm ArcView, between 2016 and 2021 in North America, pot sales are expected to have a compound annual growth rate of 26%. This translates to almost $22 billion in sales, enough to have a big chunk of profit for growers, distributors, and retailers. This has obviously caused investors to be excited.
But be warned that the ‘Green rush’ also have a lot of hidden risks. Here are a few:
Many shell companies have come in to capitalize on the marijuana mania. Some companies just change their name and prefix ‘bio’ to it, to be counted among the marijuana stocks. Investing in such companies without proper research can cause you to lose a lot of your capital.
#2 Changing Politics
Even though the public opinion has been generally in favor of pot and marijuana, many lawmakers are still on the fence regarding its legalization. The political opinions may keep changing based on what party is in power.
Despite the legalization of cannabis in 29 U.S states, it is still classified by the federal government as a schedule I drugs. The schedule I drugs are defined as “wholly illegal, prone to abuse, and have no recognized medical benefits.”
In the 29 states that are currently “legal”, there is new federal policies getting approved that give state-level attorneys general the choice to whether or not bring marijuana charges against businesses and people.
All these are quite risky for the industry as a whole.
#3 Too much supply
Since the legalization, the market is now flooded with new pot and marijuana companies. Millions of square feet of greenhouse facilities are now constructed or in development. Once all this comes into the market, it can lead to an oversupply. This, in turn, can lead to lower wholesale prices and margins, impacting the profits and stock prices.
#4 Management Risk
Due to the recent legalization of the industry, many of the pot and marijuana stocks are managed by relatively inexperienced people. Hence, it is possible that the management team of pot stocks would be potentially prone to mistakes. This is something investors need to be aware of.
#5 High Volatility
Marijuana stocks are generally expected to have volatile swings, especially in an emerging market. The high visibility of marijuana stocks in the media can also contribute to wild moves. Investors should make sure to have a proper stop loss in place so that it is not hit during the wild swings.
#6 Dilution of Shareholders
Shareholder dilution is another risk of marijuana stocks. Cannabis-based stocks usually have issues finding financial services, as federal law permits fining of financial institutions that aid marijuana companies. The tax rates are also as high as 70% to 90% for weed businesses. So, bought-deal offerings or secondary offerings are used to raise capital by these companies. This leads to rising of share counts, diluting investors in the process.