Are you looking to invest in the cannabis industry and make some money in the next big gold rush? If so, these tips will surely help.
Focus On The Sector’s Largest Companies
The cannabis sector is full of nano-caps and micro-caps. Those are companies that have market capitalizations under $50 million and $250 million, respectively. Those young companies, on one hand, offer amazing growth potential. On the other hand, these companies are prone to having extreme bouts of volatility. This volatility may be driven by unexpected fluctuations in earnings growth and sales. Also, it is much easier for large traders that have billions in order to push $50 million in stock around. Focusing on the largest companies within the cannabis sector can help with moderating both of these issues.
Some of cannabis’ best opportunities are occurring outside of the U.S. Canada, for example, by next summer will be legalizing recreational cannabis. Medical cannabis has been legalized by Israel and is moving towards legalizing recreational use. Australia voted in fall of 2016 to legalize medical marijuana. Local companies that are listed on the stock exchanges of these countries are scrambling around to cash in on the trend.
Separating winners from losers within the young cannabis industry is going to be hard. Some of those companies will develop into world leaders, with others ending up failing and filing for bankruptcy. That is why I recommend diversification. When you own a portfolio of marijuana stocks if one goes bust, your overall portfolio will survive still.
Peripheral Versus Core Holdings
It is a good idea within a well-diversified portfolio, for your holdings to be weighted differently. A higher allocation should be given to larger cannabis stocks, while more speculative, smaller cannabis stocks should be given a smaller allocation in your overall portfolio.
Focus On the Long Term
The cannabis industry is prone to experiencing extreme volatility bouts. For example, the entire sector during early 2014 rallied over 200%. However, over the next 18 months, it fell into a bad bear markets with some stocks in the cannabis sector falling over 50%. Don’t worry about the volatility and allow it to distract you from the overall big picture. The genuine opportunities in cannabis will arise over the long term.
Don’t Stress Over Valuation
Expectations are running high for the best marijuana stocks. Investors are really excited about the opportunity. This exuberance is on display for the valuations of these companies. Some of the more popular cannabis stocks have absurd-looking valuations compared with the S&P 500. Some people bash the valuations as being unsustainable. There may be some merit to this, however don’t allow the criticism to prevent you from being able to see the big picture opportunity that exists.
Make Use Of Limit Orders
Purchasing cannabis stocks may be quite a bit different than purchasing a blue-chip like Alphabet. Cannabis stock spread can be a lot wider compared to blue-chis due to their lower daily trading volumes and smaller market caps. When purchasing or selling cannabis stocks, what I recommend is that you always use limit orders. That will help you with avoiding price slippage on entry prices.