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How To Profit From the Coming Burst of the Chinese Credit Bubble

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China has quickly become one of the most important parts of the global economy, as its GDP exploded in the past decades, and today a huge portion of the global growth is attributed to the country. This means that a crisis in the country would have a much larger effect on the global markets and economies than any time before. In the aftermath of the US credit crisis, China restarted its struggling economy with an enormous stimulus program that was fueled by cheap credit and central infrastructural projects.

The corporate sector was also flooded with capital, in partly through the infamous shadow banking system, to maintain the rate of growth. This expansion fueled bubbles everywhere from the stock market to the housing market. To put the increase in outstanding debt into perspective here is a comparison with the other countries that experienced credit crisis before and the effect on the local housing market.

The problem is that the recent growth in economic output has been far from efficient and the projects that have been financed are highly unlikely to be sufficient for the debt service, let alone “real” profitability. For an investor, the most important thing is that the Chinese banking system will face a huge solvency problem that one way or another will be solved by the government. This restructuring will be very painful, and it will require a large portion of the reserves of the country.

Debt growth fails to boost the GDP anymore, but housing prices surge (source: Barron’s)

How will this affect your portfolio?

In the 2015-2016 period, the Chinese market decline caused a deep correction in international stock markets as well, while the main industrial commodities also fell sharply. The same dynamic is expected to continue, as the crazy level of construction activity declines. A Chinese “hard landing” could very well cause a global bear market, especially given the lofty valuations in the US and other developed countries.

On another note, history tells us that if a country can heal the wounds of a banking crisis by devaluing its currency than most likely it will. Also, the Chinese leadership has already used the “competitive currency” tool before, as a foundation of its cheap labor based growth model that transformed the country to the modern China that we know.

That model is now in a seismic shift towards a consumption based economy, but there are serious bumps in the road ahead, with the current credit excess being the first major one. The Chinese Yuan already declined by around 15% against the USD, as the Chinese interest rate fell, and it’s almost granted that it will fall much further before the restructuring concludes.

How to play China in a smart way?

As profiting on the decline of the Yuan is not easy, investors could look for other, less direct ways to profit from the inevitable burst. Gold is an obvious choice in the case of a credit crunch, as the masses will further lose their faith in central banks and fiat currencies, while the central banks will once again try to print their way out of the problem. Bitcoin and cryptocurrencies are also already profiting from the Chinese situation, as Asian demand for them is skyrocketing. This will likely accelerate, as the situation in China deteriorates, and the debasing of the Yuan gathers steam.

Another way to play the crunch is to go short the assets that will be affected the most, like industrial commodities (copper, iron ore, aluminum etc.) and the related companies, stock markets, and currencies like the Australian Dollar and the Canadian Dollar. Chinese stocks will also likely decline in value, but shorting them is not easy for an average investor. Most importantly, reducing your exposure to risk assets, mainly stocks, is a good idea, as bonds are a much better bet in the times of credit deflation.

With most markets still trending higher, gradually selling into strength is still possible and easy. It’s also highly likely that in the coming years there will be great opportunities to get back into risk assets. That said, exactly timing the end of a bull market is impossible, and it could be frustrating to sit through several months of gains, but market declines are usually quick and devastating and staying calm in those times is even harder.

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.6 stars on average, based on 349 rated postsTrader and financial analyst, with 10 years of experience in the field. An expert in technical analysis and risk management, but also an avid practitioner of value investment and passive strategies, with a passion towards anything that is connected to the market.




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5 Top Yielding Stocks That Outperform The S&P 1500

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Stocks jump

Barron’s columnist Mike Hulburt has identified five high yielding stocks that have strong growth potential, using Dow Theory Forecasts, a longtime newsletter that focuses on high yielding stocks.

In summarizing the five stocks – Washington Prime Group (WPG), Consolidated Communications Holdings (CNSL), Seagate Technology PLC (STX), Hersha Hospitality Trust (HT) and Macy’s (M), Hulburt explores the rationale behind Dow Theory Forecasts. He cited a new study from the Dow Theory Forecasts newsletter on a portfolio of stocks with the highest dividend yields that have outperformed the S&P 1500 since 1990 by an average annualized 1.3 percentage points.

Many stocks in the portfolio lost money over the years while their dividends got cut or eliminated, Hulburt noted. General Electric, for example, recently cut its dividend in half as its stock lost nearly 40% in a year the S&P 1500 index gained 19%. The portfolio nonetheless improved sufficiently with its other stocks to more than compensate for the losses and outperform the market as a whole.

The Dow Theory Forecasts built a hypothetical high dividend performing portfolio to optimize the chance of owning a stock with a dividend that would soon be cut. This was accomplished by investing only in S&P 1500 stocks with the highest yields, yields beyond 8%. Only 24 stocks – 1.6% of the total – posted yields at that level, according to FactSet, a financial data and software provider. Since 1994, only nine stocks posted this performance at any given time.

A portfolio with high yielding stocks is not typically conservative, Hulburt observed. During the financial crisis, stocks at the October 2007 high yielded more than 8%. By the March 2009 low, they had fallen by 63.1% on average, according to FactSet. The Dow Jones Industrial Average, by comparison, lost 53.8%.

The conventional wisdom holds that high dividend paying stocks are more conservative than growth stocks paying no dividends. This is the case for higher quality dividend paying stocks, but not for those with the top dividend yields, Hulburt noted.

The Dow Theory Forecasts does not recommend automatically investing in a stock on the basis of having a high dividend yield. It recommends taking into account factors including the portion of earning paid out in dividends and balance sheet strength.

The Dow Theory Forecasts’ Stock Rating System

Dow Theory Forecasts’ proprietary Quadrix stock-rating system uses more than 90 variables to score stocks in six categories: momentum – defined as recent operating performance; quality; value; financial strength; earnings estimates; and performance, defined as stock price action, according to the company’s website.

For these six categories and the overall score, the system scores stocks on a percentile basis, with zero the lowest and 100 the highest. A score of 95, for example, signifies the stock outperforms 95% of the approximately 5,000 U.S. stocks in the system’s universe.

Stocks cannot be reduced to numerical equations, however, and a numbers-based ranking system cannot replace individual company analysis. But a Quadrix type of system can provide a solid starting point for building portfolios.

Since the system only uses quantifiable factors, it identifies stocks achieving superior results. Similarly, because the system is not influenced by emotions that can cloud the investor’s judgment, it provides a way to track current portfolio holdings.

After the system has winnowed stocks from the vast universe, a team of Dow Theory Forecasts research analysts examine individual company performance.

Following are the five stocks that have the highest yields in the S&P 1500, and which also are recommended by at least one of the top-performing newsletters that Hulburt tracks.

Washington Prime Group (WPG)

Washington Prime Group (WPG), a mall and shopping center REIT, had a 1.2% yield, 35.7 forward price-per-earnings ratio and a 33% loss in its 52-week share price movement through Dec. 6, 2017, according to Thomson Reuters as reported by Investopedia.

For the fiscal year ended Dec. 31, 2017, net income attributable to common shareholders was $183 million, or $0.98 per diluted share, compared to $53.1 million, or $0.29 per diluted share, in the prior year. The increase in net income relates primarily to a $124.8 million gain on disposition of assets recognized during 2017 and a $56 million increase in gains on debt extinguishment in 2017, partially offset by a $45 million increase in non-cash impairment charges in 2017 and lower net revenues in 2017.

Additionally, fiscal year 2016 results include merger, restructuring and transaction costs of $29.6 million, and there were no such costs in 2017.

Washington Prime Group, near 1-year performance.

Consolidated Communications Holdings (CNSL)

Consolidated Communications Holdings (CNSL), a broadband and business communications provider, had a 12.3% yield, 38.4 forward price-per-earnings ratio and a 4% loss in its 52-week share price movement through Dec. 6, 2017, according to Thomson Reuters as reported by Investopedia.

For the full year 2017, the company’s pro forma operating revenue totaled $1,460.6 million, down 6.8% from fiscal 2016. Approximately 44% of the revenue decline is attributed to the divestiture of the equipment services business and the Iowa ILEC in 2016. The balance of the year-over-year decline is primarily due to the continued erosion of legacy voice services and access revenues as well as the step down in transition funding in CAF II support.

Consolidated Communications Holdings, near 1-year performance.

Seagate Technology PLC (STX)

Seagate Technology PLC (STX), a provider of digital storage solutions, had a 6.% yield, 9.44 forward price-per-earnings ratio and a 3% loss in its 52-week share price movement through Dec. 6, 2017, according to Thomson Reuters as reported by Investopedia.

Seagate Technology PLC reported revenue of approximately $2.9 billion for the second quarter of 2018, and GAAP and non-GAAP gross margin of approximately 30%. The company expects to report record exabyte shipments of approximately 88 exabytes, reflecting drive shipments of approximately 40 million and record average capacity per drive of 2.2 terabytes.

The strength in the company’s revenue and gross margin for the quarter was driven primarily by better-than-expected demand for the company’s HDD mass-storage solutions portfolio and operational execution.

Seagate Technology PLC, near 1-year performance.

Hersha Hospitality Trust (HT)

Hersha Hospitality Trust (HT), a provider of high quality hotels in urban gateway markets and coastal destinations, had a 6.3% yield, -217.8 forward price-per-earnings ratio and a 17% loss in its 52-week share price movement through Dec. 6, 2017, according to Thomson Reuters as reported by Investopedia.

Hersha Hospitality Trust reported net income applicable to common shareholders was $75.7 million, or $1.79 per diluted common share, in 2017, compared to net income applicable to common shareholders of $95.6 million, or $2.18 per diluted common share, in 2016.

The decrease in full year 2017 net income and net income per diluted common share was mainly due to a decline in gains on the dispositions of hotel assets.

Hersha Hospitality Trust, near 1-year performance.

Macy’s (M)

Macy’s sales in fiscal 2017 totaled $24.837 billion, down 3.7% from total sales of $25.778 billion in fiscal 2016. Comparable sales on an owned basis fell 2.2% in fiscal 2017, while comparable sales on an owned plus licensed basis dropped by 1.9%. Total sales for fiscal 2017 reflect a 53rd week, whereas comparable sales are on the same 52-week basis as fiscal 2016.

Macy’s, Inc.’s 2017 operating income totaled $1.807 billion, or 7.3% of sales, compared to operating income of $1.315 billion, or 5.1 of sales in fiscal 2016. Operating income for fiscal 2017 totaled $2.098 billion, or 8.4% of sales, excluding $186 million of restructuring and other costs, and $105 million of non-cash retirement plan settlement costs.

Macy’s is strategically investing to accelerate the rollout of near-term growth initiatives impacting stores, technology and merchandising. The company has also created an employee incentive program to improve engagement with associates at every level of the organization.

Macy’s Inc., near 1-year performance.

Other Strategies To Consider

Hulburt noted there are other investment strategies to consider.

The Investment Quality Trends, edited by Kelley Wright, offers another investment approach to identify risk adjusted performance over the trailing 20- and 30-year time periods monitored.

Wright suggests stocks with the highest “relative dividend yields.” A stock’s relative yield is the way its current yield stacks up against its range of past yields. If the underlying company meets certain criteria for financial strength, Wright recommends it when the yield reaches the high end of its range.

Featured image courtesy of Shutterstock.

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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3.9 stars on average, based on 8 rated postsLester Coleman is a veteran business journalist based in the United States. He has covered the payments industry for several years and is available for writing assignments.




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Saudi Arabia’s Futuristic City and How We Can Benefit from It

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The Saudi Arabian Crown Prince Mohammed bin Salman announced plans to build a new city called ‘NEOM’, with an investment of about half a trillion dollars. This is one of the many steps being taken by the Prince to reduce the Kingdom’s dependency on oil. Let’s know more about this project and see if we can benefit from this.

Key observations

  1. Saudi Arabia announced building a futuristic city, called NEOM
  2. This is part of the Vision 2030 plan of the Crown Prince
  3. If successful, this project can wean away Saudi Arabia’s oil dependence
  4. We can trade this turnaround in Saudi Arabia through an ETF

What does the name NEOM stand for?

Though NEOM sounds like a name taken from the latest sci-fi movie, in reality, it is formed by a mix of Latin and Arabian languages.

According to Al Arabiya, the first three letters of the name, ‘NEO’ means ‘new’ in Latin and the letter ‘M’ is an abbreviation for ‘Mostaqbal’, which means ‘future’ in Arabic.

Where will it be located and how big is it going to be?

NEOM will connect to Egypt on one side and Jordan on the other, making it the first private zone that is expected to span in three countries.

The mega city will be built over an area of 10,230 square miles, making it 33 times bigger than New York City.

What does the city plan to achieve?

“This place is not for conventional people or conventional companies,” Prince Mohammed told an audience of investors gathered in Riyadh. “This will be a place for the dreamers of the world,” reported The Washington Post.

It will entirely be powered by renewable energy, have driverless cars, be drone friendly, with a lot of robotics being used for various activities.

“Robots,” said Marc Raibert, the CEO of Boston Dynamics, to the conference crowd, “could perform a variety of functions, covering areas such as security, logistics, home deliveries and even looking after the elderly and infirm,” in NEOM, reported The Washington Times.

Through this project, the Crown Prince aims to provide direction to the younger generation of Saudi Arabia and keep them away from the restlessness building in the region.

“Seventy per cent of the Saudis are younger than 30. Honestly, we won’t waste 30 years of our life combating extremist thoughts. We will destroy them now and immediately,” said Prince Mohammed, reports news.com.au.

Currently, the public sector is the major employer of the Saudi’s, which eats up about 50% of the nation’s total expenditure. However, the Vision 2030 plan aims to shrink it to only 20% and this will need a large private partnership. NEON is a step in that direction.

The new city is being modeled on the lines of Dubai, a duty-free zone. If all goes according to the plan, the mega city is expected to earn a GDP of $100 billion by 2030. In 2016, the oil-rich nation had a GDP of $646.4 billion.

Therefore, NEON, if successful, will be a major source of revenue for Saudi Arabia. The project will be spearheaded by former Alcoa boss Klaus Kleinfeld.

What are the reservations of the Western investors?

Though the dream project of the Crown Prince has huge aspirations, the western world will be closely looking at the execution because the previous projects have not been very successful.

The King Abdullah Economic City in Rabigh, which was built to house about 2 million people, hardly has 5,000 permanent residents, according to the Capital Economics report. The Kingdom ranks 94th out of 190 nations in the World Bank’s ranking in ease of doing business. Its ranking is way lower at 158, in trading across borders. Hence, for this project to be successful, Saudi Arabia will have to make a lot of changes to become business friendly.

Though the Crown Prince has promised that NEON will operate independently, without any interference from the “existing governmental framework”, investors will want to see it being implemented.

After all, it was only last month that the Saudi Arabia allowed women to drive, the last nation in the world to do so.

The Crown Prince, however, has promised that the oil-rich nation will be shifting to a more moderate version of Islam. If he follows his words with actions, then maybe he has a winner in his hands.

With all the technology being touted, will digital currencies also find a place in it?

This is just a thought, that if the city is being planned for dreamers, wouldn’t it be nice that instead of using the age-old fiat currencies, Saudi Arabia leads by example and allows only cryptocurrencies to be used in NEOM.

How can we benefit from this news?

As traders, we look for an opportunity in every news that we read. Though a long-term prospect, but a good one nonetheless.

The Tadawul All Share Index (TASI) of Saudi Arabia mirrors the performance of crude oil and rightly so. After all, the Kingdom gets a Lion’s share of its revenues from oil. Therefore, while most stock markets around the world are way above their 2007-2008 highs, Saudi Arabian stock markets are struggling.

Currently, the TASI is about 40% below its 2014 highs, when crude oil was ruling above $100 per barrel.

However, we believe that the bottom is in place for crude oil and it is likely to rally in 2018. Also, if the Crown Prince can follow up this announcement with some concrete action, the index should recover. Therefore, we can put a small portion of our portfolio into an ETF which has a significant exposure to Saudi Arabia.

KSA iShares MSCI Saudi Arabia Capped ETF offers us an opportunity to access the growth in the Saudi Arabian market.

Since its launch, the ETF has largely been range bound between $20 and $27. Currently, it is falling towards its critical support of $24. The ETF has not broken below this level in 2017. Therefore, we can buy KSA around $24 levels, once it shows signs of stabilization.

If the ETF breaks out and closes above the range, its next target is $34. We can keep an initial stop loss of $19. Our risk to reward ratio is 1:2.

However, this is a long-term investment and a contrarian bet. We are trying to buy a possible future turnaround of a nation, which currently is struggling with the impact of low crude oil prices.

Risks to our assumption

Our trade is based on two important assumptions. One, crude oil prices will move higher next year and second, the Crown Prince will implement his Vision 2030 plan.

However, NEOM needs huge investment. If crude oil prices plunge, then Saudi Arabia will struggle to fund this project. Additionally, private investors will also shun it. As a result, the project will fall into a limbo, hurting our investments.

The geopolitical tension in the region can pose a challenge for successful completion and implementation of this project.

Featured image courtesy of Shutterstock.

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.7 stars on average, based on 9 rated postsRakesh Upadhyay is a Technical Analyst and Portfolio Consultant for The Summit Group. He has more than a decade of experience as a private trader. His philosophy is to use technical analysis for momentum trading and fundamental analysis for long-term positions. Rakesh likes to keep himself fit by lifting weights and considers himself to be a spiritual person.




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Going Green: An Investor’s Guide to Cannabis Stocks

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The war on marijuana is slowly coming to an end, and don’t investors know it. Very few industries have captured the imagination of Wall Street and Main Street quite like cannabis. With legalization sweeping the continent, many investors believe they are on the cusp of a generational opportunity that cuts across the medical, consumer goods and lifestyle industries.

The past 18 months have featured several watershed moments for the cannabis industry. The most profound moment came on election day, when seven U.S. states legalized recreational marijuana. North of the border, the Canadian government recently announced it will fully legalize recreational weed on July 1, 2018, some 17 years after it sanctioned medical marijuana.

These seismic shifts in public policy have left marijuana stocks seeing green, leading to an outpour of support in the mainstream investment community. But before investors get high off marijuana stocks, it’s critical to get educated about the industry. This will help separate fact from fiction in a sector brimming with more confidence than its fundamentals say it should support at the moment.

Legalization: Where We Stand

Seven states legalized marijuana in some form during the November 8 election. California, Maine, Massachusetts and Nevada voted in favor of recreational weed, while Arkansas, Florida and North Dakota backed legalizing medical marijuana.

From an investment perspective, much of the excitement emanates from the four states that legalized recreational cannabis. California is widely regarded as the proxy for the marijuana industry. If cannabis can succeed here, it can succeed anywhere. 

Colorado has also given investors a good indication of how cannabis reform can generate growth. The sale of recreational marijuana topped $1.6 billion in 2016. That translates into $200 million in tax revenue for the state.[1] 

Though legalization has been a resounding success in Colorado, the outcome is only a fraction of what California can achieve. For starters, California is eight times bigger, and if it were its own country, it would be the world’s sixth largest economy. California’s path from legalization to business generation will have a direct impact on the pot debate across the country.

The state has already vowed to fight a recent federal crackdown on recreational use, with an unusual alliance of government officials and the cannabis industry quickly taking shape. That’s because state lawmakers realize that marijuana is big business and a potential boon to the local economy. The November referendum also convinced state lawmakers that a huge swathe of the population was in full support of legalization.

Other States to Watch

Investors concerned about the federal ban on cannabis should take solace in the fact that the legalization debate is heating up across the country. In addition to the eight states that have fully legalized recreational cannabis, seven others are debating its future. The legalization debate is germinating in Delaware, Rhode Island, New Jersey, Vermont, Missouri, New Mexico, Kentucky and Texas, a sign they could be next headed to the polls.

Legalization was barely struck down in Arizona last November, with 51.3% of state residents voting against Proposition 205, a statute that would have permitted recreational use.

Source: Business Insider. States Where Marijuana Is Legalized.

Canada

There’s just as much excitement about marijuana in Canada, which is expected to fully legalize recreational use of the plant in the not-too-distant future. In early April, the federal government filed an Act to Amend the Controlled Drugs and Substances Act with the legislation officially introduced two days later. Justin Trudeau’s government is expected to implement the legislation by July 2018.[2]

Although Canada became one of the first countries to legalize medicinal marijuana back in 2001, the nation’s marijuana industry is only worth about $100 million (keep in mind, Canada is one-tenth the size of the U.S. in terms of population and GDP).

Industry players are now awaiting provincial legislation on who will be allowed to sell recreational cannabis. To date, 40 marijuana licenses to grow the plan have been granted by Health Canada. Most of these companies are already sanctioned to sell marijuana to patients via mail-order system.  

Marijuana Industry Growth and Future Potential

Perhaps no other industry has languished from pent-up demand more than marijuana. In the United States, the plant has been outlawed at the federal level since 1937. That’s 80 years of pent-up demand being met by the black market. During this period, there were few investment opportunities up until the recent growth of medical marijuana companies.

In just one year, marijuana has gone from an obscure and esoteric industry to a multi-billion-dollar enterprise that has resulted in the very first exchange-traded fund (ETF) being issued. The Horizons Medical Marijuana Life Sciences ETF (HMMJ) began trading on the Toronto Stock Exchange in April, ushering a new era for marijuana investments.

According to Arcview Market Research, revenues from legal marijuana sales reached $6.7 billion in 2016, an increase of 30% from 2015. Sales should rise at a CAGR of 25% through 2021 to reach $20.2 billion.[3] All this, and only around half of U.S. states have legalized marijuana to some degree. Analysts say that only broadband internet and cable television had a bigger growth trajectory than cannabis. 

In Canada, legalized recreational weed could ignite a nearly $9 billion industry, eclipsing the combined sale of beer, wine and spirits, according to Deloitte. An estimated 600,000 kilograms (more than 1.3 million pounds) of weed will need to be produced to meet the expected demand. That’s far more than the country’s existing licensed producers are capable of growing for medicinal uses.

Clearly, there’s plenty of reason to be bullish on marijuana. The industry is already drawing parallels to the dot-com era, which provided value investors with a rare opportunity to generate enormous wealth in an extremely short period.

How to Invest in Marijuana

In terms of growth, very few industries can compare to cannabis. Like other industries, the leading marijuana companies can be bought and sold as stocks on the open market. In North America, these stocks can be found on the Nasdaq, Toronto Stock Exchange, TSX Venture Exchange and U.S. Over-the-Counter (OTC) market. Marijuana stocks traded Over-The-Counter contain the following symbol: OTCMKTS.

OTC is a decentralized market where investors can trade with one another through email, telephone and other electronic means. In an OTC environment, the dealer acts as the market maker by quoting prices at which they are willing to buy or sell a particular stock. An OTC trade can be carried out without others being aware of the price at which the transaction was made.[4]

Investors who wish to access OTC securities must open an account with a broker that allows Over-The-Counter trading. Since OTC securities are unlisted, there is no central exchange governing the market. This essentially means that all OTC trades must be placed through market makers, a type of broker-dealer firm that competes for customer orders. Typically, OTC securities can be traded on either a discount brokerage or full-service brokerage, including online trading accounts.

Just about any type of pharmaceutical or marijuana stock can trade on the OTC market. OTC provides access to companies ranging from large-cap conglomerates to small and micro-cap growth companies. Since most marijuana stocks are still in the early-stage or developmental phase, they typically do not qualify for the OTCQX Venture Market, which is the home of OTC stocks that are generally considered to be higher quality investments.

Companies listed in the OTCQB exchange are current in their reporting to a major regulator and have greater information availability to investors. Companies that are listed under the Venture Exchange have a green checkmark on the official OTC website indicating their information is verified. “Verified” securities are those whose profile has been confirmed by a representative of the OTCQB within the last six months. A growing number of marijuana companies have already made their way to the OTCQB.

It should also be noted that although investing in OTC stocks is more accessible than ever before, this avenue is considered riskier than conventional exchanges. That’s because many of the companies on the unlisted exchanges are very small, making them prone to wild fluctuations and added volatility. These characteristics define most marijuana stocks regardless of the exchange in which they are listed.

Investors trading marijuana stocks Over-The-Counter or through a conventional exchange should generally avoid companies with very little information. These companies may be extremely illiquid, thereby adding unnecessary risk to your portfolio.[5]

The Marijuana Index

The Marijuana Index is one of the easiest ways for investors to keep track of North America’s most prominent cannabis companies. The index and its subcomponents track the leading stocks operating in the legal cannabis industry in the United States and Canada. Naturally, the index is divided into two country sub-indexes: the U.S. Marijuana Index and the Canadian Marijuana Index. Each company tracked is assigned to either index, depending on the location of their primary business operations.

All three indexes began trading January 2, 2015, and were given an inception value of 100.00 points. The Marijuana Index is equal-weighted, which means each stock is granted the same importance as others in the basket. This is also the case for the U.S. and Canadian sub-indexes. The indexes are rebalanced on a quarterly basis on the last day of March, June, September and December.

As of Oct. 25, 2017, there were 311 companies listed in the Marijuana Stock Universe.

The U.S. Marijuana Index is an equal-weighted benchmark of the country’s top-20 cannabis companies. These companies, and their associated symbol, are presented below:

Name Symbol Market Cap
Terra Tech Corp TRTC 120.96m
Surna Inc SRNA 19.53m
Solis Tek Inc SLTK 42.03m
MariMed Inc MRMD 60.43m
Marapharm Ventures Inc MDM:CNX 85.39m
MCIG Inc MCIG 55.76m
Kush Bottles Inc KSHB 108.87m
Innovative Industrial Properties Inc. IIPR 68.40m
GW Pharmaceuticals Plc GWPH 2.62b
GrowGeneration Corp GRWG 25.83m
Golden Leaf Holdings Ltd GLH:CNX 62.82m
CV Sciences Inc. CVSI 19.31m
CannaRoyalty Corp CRZ:CNX 123.75m
Cannabics Pharmaceuticals Inc CNBX 79.01m
Cannabis Sativa Inc CBDS 55.60m
The Canadian Bioceutical Corporation BCC:CNX 111.98m
Axim Biotechnologies Inc AXIM 323.83m

The Canadian Marijuana Index is a gauge of ten of the top-twelve marijuana stocks traded in Canada. This list includes:

Name Symbol Market Cap
Canopy Growth Corporation WEED:CA 2.23b
CannTrust Holdings Inc. TRST:CNX 393.49m
The Hydropothecary Corporation THCX:CA 158.72m
Tetra Bio-Pharma Inc. TBP:CA 77.01m
OrganiGram Holdings Inc OGI:CA 306.57m
Namaste Technologies Inc N:CNX 40.65m
Cronos Group Inc. MJN:CA 445.70m
Maricann Group Inc. MARI:CNX 101.31m
MedReleaf Corp. LEAF:CA 1.04b
Newstrike Resources Ltd. HIP:CA 128.55m
Supreme Pharmaceuticals Inc. FIRE:CA 271.94m
Emerald Health Therapeutics Inc. EMH:CA 137.03m
Emblem Corp EMC:CA 118.86m
CanniMed Therapeutics Inc. CMED:CA 262.08m
Cannabis Wheaton Income Corp. CBW:CA 205.06m
Aphria Inc. APH:CA 958.33m
Aurora Cannabis Inc. ACB:CA 1.09b
Abcann Global Corporation ABCN:CA 110.59m

An Introduction to Marijuana Industries

The marijuana industry is more diverse than it appears at the surface. Although weed growers continue to receive most of the headlines, the industry features a large cross-section of businesses that span nearly a dozen sectors. In the following, we introduce investors to 11 industries operating within the broader marijuana sector (source: The Marijuana Index).

Agricultural Technology: The Agricultural Technology industry includes companies that contribute to the production and cultivation of marijuana by providing technologies, equipment and supplies to grower operations. Companies: Scotts Miracle-Gro Company (SMG), Zerez Holdings (ZRZH), Solis Tek Inc. (SLTK)

Pharmaceutical/Biotechnology: The Pharmaceutical/Biotechnology industry accounts for businesses focused on the research and development of pharmaceutical drugs and products involving cannabinoids. This industry represents the largest share of the U.S. marijuana market. Companies: GW Pharmaceuticals Plc (GHPH), Insys Therapeutics Inc. (INSY), Axim Biotechnologies Inc. (AXIM).

Consumption Devices: The Consumption Devices industry includes companies involved in developing and selling personal consumption devices, such as inhalers, for consumers of cannabis. Companies: Namaste Technologies Inc. (N:CNX), Wildflower Marijuana Inc. (SUN:CNX), Wildflower Marijuana Inc. (WLDFF).

Cultivation and Retail: Cultivation and Retail includes companies that grow and sell marijuana plants and related products. In Canada, this industry is dominated by licensed producers. Companies: Canopy Growth Corporation (WEED:CA), Aurora Cannabis Inc. (ACB:CA), Cronos Group Inc. (APHQF).

Hemp Products: The Hemp Products industry is primarily concerned with the production and sale of hemp and related products. Hemp is a member of the same plant species as cannabis, but has a lower concentration of THG and a higher concentration of non-psychoactive compounds. This makes it suitable for various products, such as paper, textiles and clothing. Companies: Medical Marijuana Inc. (MJNA), Earth Sciences Tech Inc. (ETST), Lexaria Bioscience Corp (LXX:CNX).

Investing and Finance: Companies involved in the investment and finance of cannabis, such as holding companies and asset managers, are also part of the dynamic marijuana sector. Companies: CannaRoyalty Corp (CRZ:CNX), First Harvest Corp (HVST), Amfil Technologies Inc. (AMFE).

Marijuana Products: The Marijuana Products industry is comprised of companies that are involved in the development and sale of marijuana-infused products, such as drinks, oils and lotions. Companies: Cannabis Sativa Inc. (CBDS), Radient Technologies Inc. (RTI:CA), Lifestyle Delivery Systems Inc. (LDS:CNX).

Other Ancillary: This industry consists of companies that contribute to the broader cannabis industry and that do not fit any of the other categories. Examples include companies that produce breathalyzers and testing kits, cannabis clinics and marijuana vending machine developers. Companies: Canada House Wellness Group Inc. (CHV:CNX), Cannabix Technologies Inc. (BLO:CNX), Lifeloc Technologies Inc. (LCTC).

Real Estate: Companies that develop, own or lease commercial property for the purpose of cannabis business are part of the marijuana Real Estate industry. Companies: Praetorian Property Inc. (PRRE), Innovative Industrial Properties Inc. (IIPR), Grow Condos Inc. (GRWC).

Secondary Services: The Secondary Services industry consists of businesses that provide general consulting and business services to marijuana growers and retailers. Consulting services include market research, business development, branding and logistics. Companies: Cannagrow Holdings Inc. (CGRW), Novus Acquisition and Development Corp (NDEV), Americann Inc. (ACAN).

Technology and Media: The Technology and Media industry includes companies that provide software and media solutions to cannabis businesses and consumers. These services include enterprise software, e-commerce services and trading platforms for cannabis companies. Companies: Helix TCS Inc. (HLIX), Eco Science Solutions Inc. (ESSI), Bang Holdings Corp (BXNG).

Despite all the promise of recreational weed, most viable marijuana investments are concentrated in the medical biotechnology/pharmaceutical industry – at least for now. Investors looking for an immediate impact on their portfolio are more likely to succeed with a medical grower.

However, recreational weed is expected to be a huge money maker in the not-too-distant future. Favorable government policies, steadily growing public support and a burgeoning grower industry make recreational marijuana a promising enterprise across North America.

How to Build a Green Portfolio

Many of the same strategies involved in building a traditional stock portfolio also apply to the marijuana sector. Things like asset allocation, long-term strategy and deep fundamental analysis are critical for long-term success. At the same time, however, the marijuana industry has several unique features that investors need to grasp.

For starters, the marijuana industry is inundated with speculative investments and overhyped stocks that don’t actually have a viable business model. This isn’t always apparent when one looks at the relative success of marijuana stocks. This means many marijuana investments are overvalued.

Marijuana stocks are also highly volatile. After surging to record highs following legalization, many leading stocks found themselves in the doldrums in the first quarter as political uncertainty undermined confidence in the industry.

Against this backdrop, the following strategy is likely to yield the best outcome for investing in this rapidly growing sector.

1. Diversification is key

Diversification is the cornerstone of investing. For a sector like marijuana, where picking winners and losers isn’t easy, diversification carries even greater significance. Right now, there are over 250 stocks in the marijuana sector. Among them are future billion-dollar companies as well as duds that will eventually file for bankruptcy. A diversified portfolio of marijuana securities is therefore necessary to survive what could be a volatile few years for the sector.

2. Gain indirect exposure

There are both direct and indirect ways to gain exposure to a sector. Although most marijuana enthusiasts are rushing to growers and retailers, they should also consider other companies in the value chain that make the business possible in the first place. These companies are certainly benefiting from marijuana, but are not tied to it and thus won’t go bust if the sector hits a snag.

A company like Scotts Miracle-Gro (SMG) provides the type of indirect exposure our portfolio needs to survive volatile turns in the market cycle. SMG is not a marijuana stock, but provides specialty fertilizer and supplies to the pot industry. In other words, it is benefiting from the sector’s growth without being completely tied to it.

3. Conduct fundamental analysis

There are a lot of cool sounding marijuana stocks at play right now, but that shouldn’t be your criteria for investing. Nor should you rely on a hunch for picking a winner in a sector prone to wild price fluctuations. Remember: you are not picking from the S&P 500, but from a batch of companies that have an extremely limited track record in the market.

You should therefore come to terms with the stock’s intrinsic value (i.e., what it’s really worth). This means reviewing its business model, profitability, revenue, return on equity and overall growth strategy. In other words, read the stock’s financial statement carefully.  

4. Don’t wait for a pullback to enter the market

Cannabis stocks may be volatile, but that doesn’t mean you should wait for a pullback before you invest. Although this is a common strategy investors employ, it rarely pays off. It may be painful to buy a share at 52-week highs, but it’s even worse to watch that company defy your expectations of a pullback.[6] The good news is marijuana investments are still new, so the good ones still have a long way to go before they reach their ceiling.  

5. Develop a long-term plan

It’s perfectly acceptable to allocate a certain portion of your portfolio to speculation (i.e., choosing stocks you believe can be bought now and sold at a substantial gain later on). However, your overall portfolio strategy should be based on long-term objectives. This is the only true way to maximize investment success.

As a nascent industry, marijuana offers plenty of long-term growth. There’s lots of reasons to be bullish over its long-term prospects. This alone should deter investors from being too short-sighted with their cannabis portfolio strategy.

6. Know that you’re investing in an industry with top notch growth

The reason many people enter the cannabis market is the realization they may be investing in a once-in-a-lifetime opportunity. Legalization is long overdue, and pent-up demand is not like anything we’ve ever seen. This has been clearly reflected in the industry’s rapid acceleration in such a short period. The growth and widespread adoption of legal cannabis in all its forms should serve as a motivator for investors looking to tap into this sector.

Legalization and the Future of Marijuana Investments  

Marijuana legalization across much of North America is a paradigm shift both in terms of public consciousness and public policy. Although the path forward will be riddled with uncertainty, the general trend is leaning toward looser regulation of recreational cannabis and increased support for medical research.

The marijuana sector is booming right now, but is trading at only a fraction of its full potential. The huge sales numbers we saw in 2016 are likely a sign of things to come, as the sector benefits from surging demand and growing mainstream acceptance of cannabis use. These factors could drive the next bull market in the marijuana industry – one that could rival the the dot-com boom.

From an investment perspective, cannabis stocks can still be had for relatively cheap. Like any breakout industry, there are a lot of duds out there trying to capitalize on the momentum. But there’s plenty of solid picks with fantastic growth prospects for investors with a little courage and a lot of patience.

Sources

[1] Trey Williams (February 12, 2017). “Marijuana tax revenue hits $200 million in Colorado as sales pass $1 billion.” MarketWatch.

[2] Debra Borchardt (April 13, 2017). “Canada Take Big Steps Towards Creating $8 Billion Legal Marijuana Industry.” Forbes.

[3] Debra Borchardt (January 3, 2017). “Marijuana Sales Totaled $6.7 Billion In 2016.” Forbes.

[4] Investopedia. Over-The-Counter Market.

[5] Kesavan Balasubramaniam. “How do I buy an over-the-counter stock?” Investopedia.

[6] Jeremy Lutz (March 2, 2017). “7 Essential Tips To Succeed With Cannabis Stocks.” Ino.com.

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4.6 stars on average, based on 604 rated postsSam Bourgi is Chief Editor to Hacked.com, where he specializes in cryptocurrency, economics and the broader financial markets. Sam has nearly eight years of progressive experience as an analyst, writer and financial market commentator where he has contributed to the world's foremost newscasts.




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