Beware The Wolves of Weed Street

Leonardo DiCaprio, playing penny stock hustler Jordan Belfort in the 2013 movie The Wolf of Wall Street, summed up the risks facing gullible investors:

“After all, it was the nature of twentieth-century capitalism that everyone should scam everyone, and he who scammed the most ultimately won the game. On that basis, I was the undefeated world champ.”

Stock picking is particularly treacherous in the cannabis industry. Marijuana poses huge investment opportunities, but you need to be careful. Financial wolves stalk the world of weed.

The marijuana industry is pervaded by dubious penny stocks with weak balance sheets. They’re burning through their limited cash, and they’re destined for bankruptcy. The cash flow problems of these small fry are exacerbated by the industry’s chronic difficulty in accessing mainstream financial services. Federal legislation to remove banking impediments for marijuana companies has stalled in the eternally feuding Congress.

Corporate marketing in the marijuana industry often lapses from hyperbole into outright fraud. Many marijuana penny stocks are aggressively promoted, even though they have lousy fundamentals, because they’re pump-and-dump schemes. After the insiders cash out, the sheep get slaughtered.

When researching a stock in any industry, I dig deep into earnings estimates…to look under the hood, so to speak…to gauge the true source of earnings growth. The volatile marijuana industry requires extra effort.

Let’s review the key criteria I apply when evaluating a potential pot investment.

For starters, I emphasize the time-proven yardstick EBITDA. That intimidating-sounding acronym stands for earnings before interest, taxes, depreciation, and amortization. EBITDA is a reliable marker for the cash earnings that a company can generate.

EBITDA removes the noise of tax rates, interest payments, and non-cash charges. EBITDA isn’t perfect, but it’s a better metric than growth created by one-time windfalls (say, from a tax cut). It helps separate the true profit catalysts from the smoke-and-mirrors.

Other factors I look for include sufficient cash flow to service debt; professional and experienced management (many marijuana companies are run by amateurs); product diversity; specialization (be wary of a company whose offerings are easily commoditized); and a ticker symbol traded on a major exchange (watch out for the loosely regulated “pink sheets”). Vertical integration (“seed-to-sale”) is another plus.

I also prefer a healthy market cap. Small is fine, but my Spidey-sense starts to tingle when facing micro-caps.

WATCH THIS VIDEO: What’s The Buzz for Cannabis in 2023?

If you make the right choices in the marijuana industry, you can reap exponential gains. After a disappointing 2022, pot stocks as a whole are poised for a comeback.

According to the latest data from Research and Markets, the global cannabis market was worth an estimated $27.7 billion in 2022 and it’s on track to reach a market value of $82.3 billion in 2027, for a compound annual growth rate (CAGR) during this time frame of 24.3% (see chart).

 

To be sure, marijuana stocks have cooled in recent months, as exuberance over pro-marijuana initiatives in Congress collided with the reality of persistent political partisanship.

Legalization on the federal level has taken a back seat in our divided government, but at the state level, legal marijuana is more popular than ever. One factor cementing marijuana’s importance with state leaders is the enormous and growing tax revenue from weed.

Recession-resistant growth…

As a testament to marijuana’s resilience as an industry, sales and tax revenue from pot soared amid the coronavirus pandemic. Marijuana sales flourished under COVID, even though cannabis businesses were ineligible for the federal assistance that was doled out to other industries.

According to marijuana research firm New Frontier Data, if full legalization existed in all 50 states today, we’d see the creation of more than one million new jobs by 2025.

The anti-pot crusaders are stubborn and they’re trying to roll back legalization at the federal and state levels, but it’s my contention that their efforts are doomed to fail. Many “canna-billions” are at stake. If you keep a wary eye on the predators, you can grab your share of the spoils.

Editor’s Note: As I’ve just explained, marijuana investments are poised for a rebound this year. That’s why I’ve launched an investment service called Marijuana Profit Alert.

My publication provides specific, actionable advice on the best investments in the psychotropic revolution. In my portfolio of holdings, I strive to strike the right balance between risk and reward.

Looking to make money from the marijuana bonanza? Applying rigorous criteria, I’ve unearthed hidden gems in canna-business that most investors don’t even know about. Click here to get started.

John Persinos is the editorial director of Investing Daily.

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