Last week was an incredible one for the share prices of various Canadian cannabis companies. The stock prices of these firms have traded in a volatile way in recent days. This volatility has extended into this week, with the broad basket of publicly traded cannabis firms bouncing around in an outsized fashion as investors try to guess at which direction this volatility will take these stocks.
Most cannabis producers continue to trade without earnings, or prospects of meaningful cash flow and earnings for a few years. As such, these are stocks that continue to be valued on the basis primarily of revenues. Price to sales multiples have climbed since the beginning of the year, despite the recent dip we’ve seen play out in recent days. These heightened valuations increase the inherently high levels of risk with holding onto these stocks.
That said, retail investors appear to have a greater influence on stock prices than ever before. The rise of Reddit investing strategies have taken certain sectors retail investor favour to all-time highs of late. The question of whether this momentum can be maintained remains.
I think there’s a tremendous amount of volatility on the horizon, and as such, would caution investors thinking about jumping in on cannabis stocks, on either side of the trade. Right now, these stocks are trading as highly volatile trading instruments rather than long-term investments. Taking either side of the trade could be disastrous if momentum shifts in the opposite direction.
Invest wisely, my friends.
