Four Marijuana Stocks That Should Be Profitable in 2017
Through the end of June, the broad-based S&P 500 had gained 16% on a trailing-12-month basis. Considering that stocks have historically risen by 7% annually, inclusive of dividend reinvestment and adjusted for inflation, this isn’t a return that investors are complaining about. But if you think that’s good, take a look at marijuana stocks, which have, in many instances, doubled or tripled in value over the trailing 12 months.
Why marijuana stocks are leaving the broader market in the dust
Why on Earth are marijuana stocks such a hot commodity? Rapidly changing public opinion is one predominant reason. According to a 2016 poll from Gallup and an April 2017 survey from CBS News, favorability toward legalizing pot nationally has hit a new all-time high of 60% and 61%, respectively. A separate survey from Quinnipiac University in April found broad support for legalizing medical cannabis, with 94% of respondents in favor of such a move.
Legal sales growth figures are also exciting investors. ArcView Market Research tabbed North American legal marijuana sales at $6.9 billion in 2016, and it expects them to more than triple by the time 2021 rolls around. Considering that $46.4 billion in North American sales last year were conducted entirely on the black market, there’s a steady opportunity to move customers from illegal channels to the legal market in the years to come.
Even legislative actions have investors excited about the future of cannabis. On June 19, 2017, Mexican President Enrique Pena Nieto signed a medical cannabis bill into law, joining Canada in legalizing medical pot. Furthermore, Canada is in the process of debating legislation introduced by Prime Minister Justin Trudeau that would legalize recreational marijuana as early as July 1, 2018.
In short, there are tangible reasons to be excited about the marijuana industry’s long-term growth prospects.
However, marijuana stocks can still be dangerous
At the same time, there are also a laundry list of reasons to stay far, far away from pot stocks. For example, marijuana is still an illicit substance throughout much of North America. The U.S. federal government views it as having no medical benefits, and it’s therefore wholly illegal.
This United States’ Schedule I categorization of marijuana comes with a number of inherent disadvantages for U.S. businesses and pot stocks. To begin with, researching cannabis for medical purposes is exceptionally difficult because of its Schedule I status. Also, pot-based businesses are unable to take normal corporate income-tax deductions since they’re selling a federally illegal substance. Finally, banks want little to do with marijuana companies, leaving many cannabis companies to deal solely with cash, which is a major security concern and a growth inhibitor.
But there’s more to it than just scheduling disadvantages. Marijuana stocks themselves are, in many cases, not that fundamentally attractive. Most pot stocks trade on the over-the-counter (OTC) exchanges where up-to-date information may be hard to come by. Though OTC exchanges have improved greatly from a decade ago, reporting standards are still relatively lax compared to more reputable exchanges like the New York Stock Exchange (NYSE). This can make finding accurate cash flow and balance sheet data difficult.
A majority of marijuana stocks are also losing money. Since marijuana is still an illicit substance, there are few guarantees that pot company business models are even viable over the long run.
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