Marijuana stocks: Savvy investors are ignoring valuations for now

A follow-up to my preceding piece . . .

Traditionally, investors and money managers rely on valuations to decide if a company’s stock is a good buy — or not. It’s a method of calculating theoretical values of companies and their stocks. One investing course I took many years ago suggested that investors should be wary of any stock trading at more than 150 percent of its book value, and that is a guideline I have used over the years.

But there are exceptions to these conservative approaches. For example, speculative plays like mining companies that think they may be on the verge of a gold or diamond bonanza will often see a huge run-up in stock prices, even though they haven’t made a dime yet. They are highly speculative stocks — in most cases, a bigger gamble than the slot machines in casinos.

But marijuana stocks are different — and quite unique. I doubt we will see another investing opportunity like this one for a very long time.

Some money managers are calling marijuana stocks speculative, putting them in the same boat as aforementioned mining stocks. These managers lack vision, and aren’t doing their homework. Marijuana producers are already selling their products, though certainly not enough to justify current stock valuations alone. But savvy investors know that a multi-billion-dollar industry is on the verge of flowering — and there will be plenty of revenue to go round for many marijuana companies.

One report I saw for California predicts it will be grossing sales of $22 billion annually in recreational pot sales. Ditto for the whole of Canada. There will be room in Canada for 30 or more marijuana companies, because no one company will be able to handle the demand. Ditto for the U.S.

In other words, savvy investors know that valuations are going to surge for marijuana companies, and they are pricing that knowledge into today’s stock prices. Once pot is fully legalized in Canada and we’ve had a year or two to gauge revenues and profits, share prices will more closely reflect valuations — and those valuations will be, um, high for legitimate producers.

I can see how traditional money managers who refuse to deviate from their conservative approach see this as “speculation,” because we can only guess now at future marijuana company valuations. But these managers need to get away from the mineral play mindset and look at marijuana as the bonanza it already is: it is probably the richest play in the history of stock markets with very little downside risk if one chooses companies wisely.

Savvy investors are choosing now, while conservative money managers sit back and wait for valuations to settle down (or up) once the industry is fully established. Then, those managers will be buying marijuana stocks from the people investing today — at huge markups of 1,000 or 2,000 percent or more.

— Jillian

Photo credit: TMX Group, by Open Grid Scheduler / Grid Engine, Wikimedia Commons

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