The incredible boom in Canada's nascent marijuana industry has probed many investors to consider what long-term value could be gleaned from investing in marijuana producers at current levels.
Most analysts and investors know the risks related to stocks which are trading at valuations which exceed those of established companies that currently amass significant cash flow.
The risks inherent in owning companies with outsized valuations is clear - in times of distress, a lack of fundamental support could lead to selloffs which wipe out a significant portion of one's portfolio, a scenario most long-term investors look to avoid.
Canada's main exchange traded fund (ETF) which tracks the marijuana sector is Horizons Marijuana Life Sciences ETF (TSX:HMMJ). Late last week, Horizons announced it would be broadening the companies it covers in this ETF to include Tilray Inc. (NASDAQ:TLRY), a company which has seen incredible volatility in recent trading days, prompting many to question the underlying assets of such ETFs.
At least from a volatility perspective, investors looking to ETFs as a way of reducing volatility may have reason to be concerned with this move.
At current valuation levels, marijuana-related businesses are not investments long-term fundamental investors should consider.
For those who believe the industry will multiply over time, I would recommend looking to buy after valuations become sane again following the next mass selloff. For those seeking long-term growth and fundamental stability, I would look to a host of other excellent Canadian options out there at this point in time.
Invest wisely, my friends.
