Here's Why Pot Stocks Are Headed Down

Written by Charles Mizrahi
Posted June 21, 2018

I hate pot.

Growing up in the 1970s, all my friends smoked pot.

I never did. Well, I tried it one time. I took one drag, and that was enough for me.

I couldn’t stop coughing, and the smell made me sick.

I wanted to disclose this information before I shared my thoughts on pot stocks...

Marijuana Legal Drug Dealers

Because right now, investors are rushing into pot stocks. They're dreaming of making 20 times their money.

Senators Cory Gardner and Elizabeth Warren have introduced a bill to legalize marijuana at the federal level. Currently, only nine states have made the use of recreational marijuana legal.

Companies are pitching riches beyond investors' wildest dreams. Thoughts of adding pot to candies, soda, and gummies are the path to easy money.1

But before you start dreaming, too, let’s look at this rationally...

The key question that you need to ask is this: Is putting money into pot stocks an investment or a speculation? Your answer to that question will tell you a lot about the type of investor you are.

And here’s why...

Investing Vs. Speculating

More than 80 years ago, Ben Graham, Warren Buffett’s teacher, defined what an investment is.

He wrote:

An investment operation is one which, upon thorough analysis, promises safety of principal and a satisfactory return. Operations not meeting these requirements are speculative.

Pot stocks don’t pass Graham’s definition of an investment.

Sure, you might spend a lot of time doing a thorough analysis on pot. And the returns can be satisfactory and even huge. But they do not promise safety of principal.

And because they don't qualify as an investment, they're a speculation. In other words, putting money into pot stocks is a speculation.

I have no problem if you choose to put your money into a pot stock. But I caution you not to fool yourself into thinking that you're making an investment...

The Value of Pot Stocks

Other than a handful of cannabis stocks turning a profit, most are losing money. And the ones that are making money are trading at sky-high valuations.

Over the last 12 months, Aphria Inc. (APHQF) has only earned $0.16 per share. The stock is trading at $8.80 per share, or 56 times earnings.

Apple (AAPL) earned $18.29 per share over the same period of time, and its stock is trading at only 10 times earnings. Apple also has more than $250 billion in cash on its balance sheet. Aphria only has $120 million...

There's a very low probability of suffering a permanent loss of capital when you invest in Apple. But the same can’t be said for Aphria.

And that also goes for the majority of cannabis companies that haven’t even made profits yet.

I don’t have a problem with you taking some of your hard-earned money to buy lottery tickets.

But you shouldn't then fool yourself into thinking that you're investing. You’re speculating. And if you're speculating, you should be mentally and financially prepared to lose your money.

The way I see them, cannabis stocks are nothing more than lottery tickets. You have a high chance of losing money, but the dream of hitting it big is alive and well...

Questions to Ask Before Buying Pot Stocks

So, before making any investment, I suggest you ask yourself the following questions:

  1. Did I spend the time doing my analysis? Most investors don’t do anything more than look up the ticker and then go online to buy a few hundred shares. That’s not the way to get rich by investing in stocks. If you're doing that without spending a few hours to learn about the industry and company, you’re bound to lose money.

  2. Can I suffer a permanent loss of capital? There's a difference between seeing the stock price moving up and down and losing money. Stock fluctuations are part of the game. Stocks move higher and lower over the short term based on noise. Permanent loss of capital is when the company goes belly-up and the stock is worthless. That's what you want to avoid. When making an investment, if there's even a slight chance that you'll lose all your money, you should walk away.

  3. Does this investment offer me a good return? If you’re going to put your money at risk, you better get paid for it. Putting your money into a high-risk investment only to make a return not much higher than a 10-year Treasury bill yield, which is currently about 3%, is just plain dumb.

If you can’t answer each of these questions, then don’t do anything. Just stand there.

The key to making money over the long term is to make a bunch of smart decisions over the short term.

I’d start with one smart decision right now.

Stick with companies that have a healthy balance sheet and are trading at a bargain price.

Here are a few of the stocks on my list that I’m watching: Fiat Chrysler (FCAU), Bed Bath & Beyond (BBBY), Signet Jewelers (SIG), and Micron Technology (MU).

All my best,

Charles Mizrahi signature

Charles Mizrahi
Founder, Park Avenue Digest

follow basic@Park_Ave_Digest

Charles cut his chops on the trading floor of the New York Futures Exchange before he moved on to become a wildly successful money manager on Wall Street.

And with more than 35 years of recommending stocks under his belt, Charles has knocked the cover off the ball. He's compiled an amazing record of success and posted gain after gain for his loyal readers. He's the founder of Park Avenue Investment Club and Insider Alert newsletters.

Charles is also the author of the highly acclaimed book Getting Started in Value Investing.

1 The National Institute on Drug Abuse (NIDA) recently published a study on marijuana. Nationwide trends are not pointing in the right direction for kids 12 years old and up.

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