Why marijuana company shares are surging to record highs

CANNABIS-related stocks are flying on the share market but potential investors are being warned to be careful their money doesn’t go in a puff of smoke.

CANNABIS-related stocks are flying on the share market but potential investors are being warned to be careful their money doesn’t disappear in a puff of smoke.

The Federal Government’s announcement on January 4 to allow companies to export medicinal marijuana has propelled little-known companies’ share prices to record highs.

Share analysts say an extra boost has come from the US state of California legalising recreational marijuana use on January 1 and a global push towards greater use of the drug for medicinal purposes.

However, investing in small, speculative companies is always risky, analysts say, because only a few are likely to succeed.

Companies that use marijuana for medicines have had a good start to 2018.

Since January 4, shares in medicinal cannabis grower AusCann have jumped 101 per cent, while Cann Group and The Hydroponics Company both surged 40 per cent but have since drooped.

MedLab Clinical shares surged 27 per cent in just one day on Wednesday after it announced it was now licensed to supply medical marijuana in Australia.

“There’s a lot of hot money going in,” said Baker Young Stockbrokers managed portfolio analyst Toby Grimm.

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“When the party’s over that hot money is going to leave, and you don’t want to be there when that happens,” he said.

“We don’t trade them in our portfolio but we have trading clients who do have a punt, and it’s been a spectacular rally.”

Mr Grimm said the global push towards medicinal marijuana meant Australian exporters would be competing against some formidable overseas competitors.

Cannabis demand is expected to grow globally as its use becomes widespread.

He said the nature of speculative shares was that they did not all succeed.

“I’m not saying one of the companies won’t ultimately be successful, but from an investment perspective you have to try to figure out which one it’s going to be.”

Patient’s use of cannabis for medicinal purposes was legalised by the Federal Government in 2016 and Victoria and New South Wales were the first states to allow it.

Australian Stock Report chief market strategist Chris Conway said Australia would eventually get to the stage where recreational marijuana use was legal “and some companies could do extremely well out of that”.

In the meantime, investors should look for companies with good management and experience in the medical field, he said, and understand that speculative investments might take a long time pay off.

“Don’t be scared of the sector … I think there’s a sustainable market,” Mr Conway said.

“Do your research and try and pick the good ones rather than the bad ones.

“You would want to find a company that is probably already operating rather than one still setting up and testing.”

@keanemoney

Originally published as Why marijuana company shares are surging to record highs