The start of 2019 saw pot stocks soar. The trend is still bullish for most top stocks and showing signs of a bright future. The big question that lingers on is what actually are investors buying? Is the increase in stock prices a representation of the true value of the individual companies? Some analysts think otherwise. In reality, pot stocks could be overpriced. This is the biggest problem with weed stocks.
Possible Causes Overvaluation
The prospects of the growth of the weed industry have attracted the attention of investors in the alcohol and tobacco industry who wish to diversify their incomes by having to invest in budding weed firms. According to Merry Jane, Constellation Brands – an alcoholic drinks producer invested in Canopy Growth – the top pot grower in the world at a cost of $4 billion. Cronos also merged with Altria for an investment worth $1.4 billion.
As the industry continues to take shape, more of such alliances and even buy-offs of small companies is likely to dominate the scene. These developments will push the prices of many pot stocks up. This because injecting such huge capital in business creates the perception that the firm will use such monies for expansion. Markets expect this to translate to increased sales and profitability.
However, a closer look at the financials of such firms reveals a worrying trend. The sales of some companies do not measure up to their current valuation. Unfortunately, such revelations only serve to hurt the pot stocks and increase their vitality. This is a red sign to would be cannabis investors. Luckily, you can do something about it.
Beating Overpriced Stocks
When planning to invest in stocks, it is wise to make an in-depth analysis of the prevailing marketing condition as well as interrogate the financial statements of the company you are interested in. When carrying out your analysis, stay focused on the facts and do not be swayed by the hype in the market.
According to Forbes, when checking the value of company stocks there are a number of techniques you can use. For starters, you will need to compute the price-to-earnings (P/E) ratio and see how it compares to the company growth rate. If the P/E ratio is higher than the company growth rate, then you should avoid investing in such firms.
You can also opt to compare the P/E ratio to those of its comparable competitors in the market. The stocks of the company would be overvalued if its P/E ratio were way above those of its competitors. By using these tricks, you analyze your way through invest traps in the pot industry.
Conclusion
Every investment opportunity comes with its challenges. For the case of cannabis stocks, several analysts have raised questions on the real value of these stocks. Those interested in this industry must first analyze investment opportunities and substantiate whether or not the value of the stocks they are interested in is what quoted in the cannabis market. This will allow them to make wise decisions and avoid losing their hard-earned money.
