The cannabis industry is experiencing a bear market, with the price of marijuana stocks dropping by over 50 percent since January. This has led to many companies in the industry struggling to stay afloat. As the industry continues to grow, it’s important for investors to find ways to invest during this difficult time.

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How-to-Invest-in-Cannabis-Stocks-in-a-Bear-Market

 

Even if we don’t enter a bear market anytime soon, you should have a strategy in place to make the most of one if one does occur. And, if you’re heavily invested in cannabis stocks, you’ll need to alter your fair-weather approach dramatically once the bears emerge from their winter slumber.

Purchasing shares in high-quality, aggressively expanding firms is difficult to go wrong with. However, fast development in the marijuana business may mask a number of problems that a market collapse might readily expose. Let’s look at why this is the case so you can better safeguard your investment portfolio.

 

While valuation is important, don’t overlook profitability.

A declining market might concentrate your attention on value if you usually prefer tiny rivals with rapidly rising sales. Unprofitable firms with excessively optimistic valuations are likely to be safer during a downturn than accurately valued businesses with sustainable profit margins and diverse sources of revenue. 

Scotts Miracle Gro (NYSE:SMG), for example, offers gardening tools and fertilizers to both customers and marijuana companies, ensuring that its income is diverse. It’s also profitable, pays a dividend, and has a trailing price-to-earnings (P/E) ratio of little under 14.3. That purchasers are prepared to pay somewhat less for its shares than the market’s average P/E of roughly 16. 

To put it another way, if a bear market is pushing investors away from risky or overpriced companies, it’s doubtful that it’s also driving them away from Scotts. Because Scotts pays a dividend, a drop in the stock price would increase the dividend yield, which is presently at 1.79 percent, luring new purchasers and reducing the effect of the drop. 

Sundial Growers (NASDAQ:SNDL), on the other hand, is expected to suffer substantially in a declining market. In contrast to successful and faster-growing pure-play businesses like Trulieve Cannabis (OTC:TCNNF), which has a P/S of approximately 4.6, its price-to-sales (P/S) ratio of almost 20 is astronomically high. When the whole market is under pressure, investors will have less reasons to sell their Trulieve shares than they would their Sundial shares.

As a result, choose cannabis stocks that aren’t overpriced or have a history of steady profits. Of course, that advice applies to many other kinds of equities as well, but the problem of profitability is particularly relevant in the marijuana business for reasons I’ll explain in the following section.

To prevent dilution, stay away from meme stocks.

In a downturn market, buying shares in possibly overpriced cannabis meme companies is riskier than ever. Meme stocks seldom make the cut for what qualifies as “quality” when investors are looking for a flight to quality, which may rapidly lead to difficulties. 

Sundial Growers, a fan favorite on Robinhood, takes advantage of their fame by issuing large quantities of new stock when retail traders raise the price of its shares. Sundial was able to expand its company into cannabis investment banking as a result of this approach, which may have allowed them to turn things around.

Even yet, when the retail investor frenzy fades or when market sentiment is unfavorable, meme stocks may find it difficult to issue additional shares at a reasonable price. If the firms need funds for operations and are unable to obtain loans or other kinds of conventional funding, they may be out of luck. This is a frequent issue for marijuana businesses of all sizes. 

As a consequence, shareholders’ equity will be diminished, and the business will likely be unable to recoup much of its investment. Marijuana companies that are profitable are unlikely to face this issue. If you don’t want to end up like this, don’t invest in the newest marijuana company that retail investors are crazy with.

Regardless of the market, solid equities are worth purchasing.

A bear market doesn’t alter much for properly priced and healthy cannabis businesses like Trulieve or Scotts Miracle-Gro. 

Even if their stock price drops, their main business operations will not be impacted since they are not dependent on external funding or issuing new shares to generate cash. And, since their values are now fair, they are unlikely to be targeted by fearful or pessimistic investors.

If you believe there will be negative sentiment for the foreseeable future, invest in quality cannabis companies that don’t need an army of retail traders to maintain their price or fresh share issuance to augment their cash flows. Even if you’re incorrect about the market’s direction, your portfolio will have a greater chance of growing.

The cbd stocks to watch is a list of cannabis stocks that are performing well in the bear market.

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