Are Cannabis stocks in trouble?
Matt McCall, editor for MoneyWire, looked at the cannabis market and sees nothing but doom:
Now that the very earliest days of legal marijuana are over, I believe we’re about to see a narrowing of the field. The strongest marijuana companies will survive and thrive… and they will cripple and then kill their competitors. The capitalist “law of the jungle” will ensure weak marijuana industry players and their shareholders will suffer huge losses. I believe this phenomenon will start in earnest this summer.
Reminders and disclaimers before we discuss this article. It is always better to develop a long term investment strategy with a paid professional than buy individual stocks. Please don't consider this article any kind of stock advice. We are commenting on an article. I'm concerned that he's misusing the word "capitalist" as a synonym for "free markets", but I'll save that argument for another day.
The kind of analysis in this article makes professional traders roll their eyes. A lot of people claim some kind of omniscience that can predict the stock market. The analysis reads like a horoscope, extremely general statements that have little chance of missing the mark. The forces of nature are going to determine the fate of public companies.
Mr. McCall doesn't even bother using numbers in his analysis. There is no talk of revenue goals or observable data. It's just his hunch which we need to take because he's had success before. This is almost the literal example of the gambler's fallacy. Just because a pattern is observed does not mean an actual pattern is present. People can try to make predictions but right now is like betting on a horse.
Let's take a closer look:
You can visualize this “narrowing of the field” as an inverted pyramid. During the early days of a promising industry, you have hundreds of companies competing to be the winner.
But as time goes on, the companies with the best products, the best customer service, the best balance sheets, and the best business plans begin to get stronger and stronger relative to their competitors. The stronger companies are able to invest more in their businesses… and they often undercut competitors on price. This drives the weaker competitors out of business.
This is pretty obvious. Of course there are going to be mergers and acquisitions in the Cannabis business but we're probably early on to start planning for that. Before we know what that is going to look like,
We still don't know what a national legalized marihuana market looks like. What does good customer service look like? What is the best business model? Do marihuana consumers prefer boutique shops or will they buy off the shelf like Miller Lite at Walmart? What brand will be like Miller Lite? What will be like Glenfiddich? Is there a business model we have not thought of yet? Also let's keep in mind that the SAFE act (which allows banks and investors to participate in the cannabis game) has not yet passed in the Senate and that will change the game completely. The market has not had a chance to sort itself out yet.
The real trouble for cannabis business in Canada, as discussed the article referenced in our previous blog, has been a lack of demand. Investors don't like large losses so the stock has taken quite a beating this year, especially in the summer when losses were high. Canada might not have enough population to make legal weed work for investors and companies have not quite figured out what business model works yet.
If you have a burning desire to get involved in cannabis stocks, there are plenty of options out there. Just remind yourself that plenty of people who thought they could predict the market have lost their shirts in the process. Diversify and plan for a day far in the future. If you want to get rich quick, go to the track.