Pot Stocks: On the Bargain Shelf?

The father of value investing, Benjamin Graham, famously said: “Price is what you pay; value is what you get.”

If you’ve been following marijuana equities, it’s no secret that they’re in a slump. But keep in mind, they’ve been falling in tandem with the broader bear market. Marijuana companies tend to be resistant to inflation and recession, but they’re also prone to get caught in the downdraft when the financial markets go into a slump.

Some readers have been asking me, is now the time to go bargain hunting for pot stocks? My answer is yes…but with qualifications and caveats.

Despite the revenue and profit growth of many leading marijuana companies this year, the bear market’s downward gravitational pull has been impossible to resist.

The benchmark Global Cannabis Stock index is down 22.3% year to date, as of market close October 3 (see chart).

For context, the SPDR S&P 500 ETF Trust (SPY) is down 22.7% YTD. The marijuana sector, then, has held its own despite global economic headwinds. It’s important to remember that marijuana is increasingly viewed by the public as a consumer staple (that’s right, a staple), and as routine a purchase as bread and milk.

It’s always risky trying to time a market bottom, of course. Stocks could fall further and buying now could be a case of trying to “catch a falling knife.” However, if you’re a patient investor, I think now’s a shrewd time to go bargain-hunting among inherently strong but beaten-down marijuana stocks.

Even if the overall market and pot stocks fall further in coming weeks, you’d still be tapping into a “megatrend” at attractive price points that were previously unattainable. The key is buying quality stocks. An article I previously wrote on the topic is a handy guide: 12 Criteria for Picking The Right Pot Stock.

By investing in value stocks, investors essentially buy a built-in gain and/or a safety net. The smallest bit of good news can propel their stock up to a fair price. Even significant bad news doesn’t necessarily bring the price down. In many cases, the stock is undervalued because such bad news was already anticipated.

Overvalued stocks, or even some fairly valued stocks, on the other hand, are highly susceptible to bad news and don’t always respond as expected to good news. Surely, you’ve held a stock that released quarterly earnings that “met expectations” and proceeded to get hammered.

In an efficient market, short-term irrational thinking is eventually corrected. Stock prices rise and fall but the market is in constant pursuit of finding fair value. This is what leads to mean reversion.

There’s an extra benefit of buying stock in intrinsically sound companies when they’re undervalued. Not only do you get exposure to strengthening fundamentals that propel prices higher over time, but in the short to medium term, you’ll probably enjoy an added bump from mean reversion.

A marijuana profit catalyst…

“You wouldn’t believe how many people smoke pot. If anyone reading this would like to become mayor, believe me, there is a vast, untapped vote.”

Groundbreaking comedian Lenny Bruce uttered those words way back in 1964, when marijuana was a social taboo and associated in the public mind with criminals, losers, and “dangerous” minorities. As usual, Bruce proved prescient. These days, marijuana isn’t just a popular herb. It’s a political vote-getter.

Accordingly, for pot stock investors, there’s added incentive to dip your toes back in the water: the U.S. midterm elections on November 8. The midterms could serve as a “profit catalyst” for marijuana equities.

In Congress, House-approved legislation to lift the federal ban is stalled in the Senate, but the states are increasingly taking action on their own.

Voters increasingly demand marijuana legalization. The forthcoming midterms will provide voters with more opportunities to express their support for the creation of new marijuana markets across several states.

There are proposed adult-use (i.e., recreational) ballot initiatives in Arkansas, North Dakota, Ohio, and South Dakota. Similarly, there are both adult-use and medical ballot measures proposed in Florida, Idaho, Missouri, Nebraska, and Oklahoma.

To get ahead of the curve, I urge you to read my new book: The Wide World of Weed and Psychedelics. The product of years of painstaking research, my book provides specific, actionable advice on how to pick the best pot stocks. Click here to order your copy.

John Persinos is the editor-in-chief of Marijuana Investing Daily. You can reach him at: mailbag@investingdaily.com

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