Marijuana is a new market. As a new market, the stocks in the sector have been volatile. It’s important for investors to remember that this has always been the case.
A recent example of the volatility of stocks in new industries is the internet. In the late 1990s, that industry became a bubble. Many companies failed to survive the subsequent crash but, a number of companies did survive and are now among the biggest companies in the world.
But, that is just one example of this pattern in history. When automobiles were new, car companies bubbled and crashed. So did radio stocks in the 1920s and computer stocks in the 1980s. In the 1880s, railroads displayed this pattern and in the 1840s, canal companies formed a bubble.
Given a deep historical perspective, marijuana stocks are just trading in line with their expected pattern. There will be volatility but this could provide an opportunity for traders.
Tilray Is One Example of Volatility
One example of volatility can be found in the Canadian cannabis company Tilray (Nasdaq: TLRY).
The stock jumped more than 90% in one day after the CEO said Tilray is considering partnerships with pharmaceutical companies.
For a few moments that day, the stock market capitalization of Tilray, a company with about $28 million in sales over the past twelve months, was worth more than the value of well established companies including American Airlines, Chipotle, and Tiffany.
But, the next day, the stock dropped more than 40%. In the chart above, both the up and down moves can be seen. A blue rectangle in the chart shows that those days were unusual. Ignoring them, the stock is in a consolidation after a sharp up move and is again drifting higher.
It Could Be Time to Ignore the Media
Moves like that reminded some analysts and journalists of the crypto markets. It wasn’t that long ago, actually less than a year ago, when the crypto market was extremely volatile. The chart of bitcoin is shown below as a reminder of the volatility.
This is a weekly chart and shows large moves both up and down. The similarity is consistent with history given that crypto is a new market and the new markets have a historical pattern of extreme price moves.
The recency of the crypto volatility brings comparisons with marijuana stocks to the minds of many. Yahoo Finance noted, “Amidst the cannabis stock fever, many investors see shades of crypto. It has become a popular sound bite: “Cannabis is the new crypto.”
The two spaces do have a lot in common: volatile trading action from day to day, with wild swings influenced heavily by media coverage and news announcements; excitement from millennials; regulatory uncertainty; and mainstream companies showing interest, like big beer brewers eyeing marijuana or tech giants implementing blockchain.”
It’s not just journalists who spotted the difference. “Owen Donley III, chief counsel of the SEC’s Office of Investor Education and Advocacy, says there’s something else the two industries have in common: fraud.”
“The fraud we’re seeing in that space [crypto] tracks the fraud we’re seeing in any other space,” Donley said on Yahoo Finance’s Final Round live show.
“If you look at some of the crypto, ICO offerings that are guaranteeing returns, promising no losses, saying they’re going to change the world, with not a lot to back it up, we’re going to be worried.
And of course that’s going to be with any industry, including marijuana. The fact that those two things are linked shouldn’t be surprising.”
The SEC noted, “Fraudsters may try to use media coverage about the legalization of marijuana to promote an investment scam. Look out for these signs of fraud:
- Unlicensed, unregistered sellers. Unlicensed, unregistered persons commit many of the securities frauds that target individual, Main Street investors. Check out the background, including registration or license status, of anyone recommending or selling an investment, using the free simple search tool on Investor.gov.
- Guaranteed returns. If someone promises you a guaranteed high rate of return on your investment, especially along with a claim of no risk, it likely is a fraudulent scheme.
- Unsolicited offers. If someone reaches out to you through social media, an e-mail, a text, or a phone call regarding an investment “opportunity,” it may be part of a scam.”
The regulators also warned that fraudsters may manipulate stock prices (for example, causing them to rise or fall dramatically) by spreading false and misleading information about a company. Microcap stocks, some of which are penny stocks and/or nanocap stocks, may be more susceptible to market manipulation than stocks of larger companies.
This is because information about microcap companies may be hard to find and microcap stocks historically have less liquidity. Be cautious if you spot red flags of microcap fraud:
- Trading suspension. Check whether the SEC has recently suspended trading of the company’s stock.
- Changes to company name or type of business. Research the company and be skeptical if the company has abruptly changed its name, industry, or business plan multiple times.
- False press releases. Press releases that seem implausible may indicate that the company’s stock is being hyped solely to drive up its stock price.
The Industry Remains Interesting to Investors
So, there is a potential for fraud and for losses. This is true for almost any microcap stock as the SEC noted. To avoid that, investors could limit their buys to larger companies. But, investors should consider the potential of the industry.
The price trend over the past year for the Marijuana Index is shown below.
Ignoring some high profile volatility, the trend is generally up. Ignoring the volatility in TLRY, the trend is generally up. There is an important message in that trend for investors.
There is a likelihood of continued volatility in marijuana stocks, But, there is also a possibility of long term gains in the new industry given widespread consumer demand for the products. That is important for investors to consider.
This is a new industry that could grow significantly in the future. That means it’s not too late to consider buying marijuana stocks.
There will be winners and losers in this new market and marijuana is likely to make millionaires out of investors who make the right trades. We’ve put together a special report that can help you navigate this emerging market. You can access that report by clicking right here.