Marijuana stocks are the latest trend to excite investors on the ASX, with the likes of MMJ Phytotech Ltd (ASX: MMJ), Auscann Group Holdings Ltd (ASX: AC8), and Creso Pharma Ltd (ASX: CPH) capturing the market's imagination in a way that this chart demonstrates vividly:
Unfortunately, none of these companies appears to be investment grade, and current movements appear to be driven by short-term opportunists gambling on higher prices. The price of each company does not reflect its current business prospects in my opinion. Or, to put it another way, investors are paying a high price now for an uncertain future that contains many challenges. Regulatory approvals are a positive, but companies face other issues including keeping manufacturing costs under control, and scaling up sales enough to cover back office and executive costs.
Indeed, shares in MMJ Phytotech have plunged 14% this morning, after hitting an all-time high of $0.75 just yesterday. Auscann shares have also fallen 5% and I doubt that we have seen the end of price volatility in the sector.
Yes, over the long term, the marijuana market opportunity might be a big one. Yet there are already more than 3 Australian pot stocks listed, plus numerous others in jurisdictions around the world. Here is a 2014 article from Forbes detailing 8 more listed marijuana companies that are likely chasing opportunities in the exact same markets as Auscann and MMJ. To my mind the industry is too fragmented at present for any of the players to become a really big player, and it is uncertain if and/or how each of the companies will differentiate its products from the other. Many players could likely end up as little more than contracted suppliers, with a few holding the valuable intellectual property and big brand names.
So while marijuana ticks the 'new and exciting' box, it does not tick any of the boxes that would get me looking at it as a potential investment opportunity.
