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MASSIVE INFLATIONARY BUBBLE?

January 24, 2019

 

The cannabis business is booming — but that's not necessarily good if you're an investor.  Negative cash flows, extreme market capitalizations,  business models out of touch with reality and lack of transparency have reduced the cannabis "game" into a crap-shoot." The pot industry faces a massive inflationary bubble. Investors must be careful.

 

Many people are entering the cannabis space only to find out that it has become a giant ponzi scheme with "new" investors "covering" prior investors. The noise wants everybody in the cannabis space. Investors have to be selective. Last week, William Barr, President Trump's nominee to lead the U.S. Justice Department, said, "Congress needs to come up with a plan to overcome the discrepancies between state and federal law." That noise had a temporary effect on cannabis stock prices. In the long term, it means nothing to the fundamentals of cannabis investments that have not calculated cannabis as a supply/demand driven commodity.
The legalization of cannabis for recreational use in Canada last year boosted interest in the industry. Many U.S. states have also approved the use of cannabis. Utah and Missouri approved the use of marijuana for medical purposes in November, while Michigan gave the green light to its recreational use. It is a matter of timing and depends on the presidential cycle that the federal government will be taxing cannabis.  The outside guess would be three years, but with the current state of federal politics, it can be next week or never.
The uncertainty about where the U.S. will go brings volatility to cannabis stocks.  Measuring earnings per share two years out is a fool's game. Over-priced cannabis related public companies have investors and insiders alike wagering on factors that are not justified on a commonsense basis.    Indeed, there is a great opportunity, but years in the making.   What the industry is today will be completely different in five years. The cannabis crop smoked today will be a tiny fraction of its use, but calculated by all business models to be a significant factor of growth and profits in the years ahead. Anti-anxiety beverages will be the main profit vehicle for the cannabis industry.

 

Keep your powder dry and apply commonsense to all investment decisions.

 

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