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If You’ve Made Some Money in Cannabis Stocks, Now’s the Time to Sell Half Your Position

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For those of you who have made some money in marijuana stocks, it is time to makes some hard choices. This is especially for you lucky people who have more than doubled your money in the stocks. Yes, the time has come for you to lock in some of those gains. It’s time for you to sell at least half. One of the most important rules of investing is not to become hooked on your stocks, so get your cash back and let the rest ride.

While these stocks are not as close to their highs as they once were, many of you have probably made some decent gains. Stocks such as Aphria Inc. (TSX:APH), Aurora Cannabis Inc. (TSX:ACB), and Canopy Growth Corp. (TSX:WEED)(NYSE:CGC) have had good runs over the past several years. Even with the recent pullbacks, Aphria and Aurora have bounced off their lows, and Canopy is approaching its high once again.

So, why be so concerned with getting your money back when things seem to be just starting to be heating up in the Cannabis industry? Well, for one thing, it is the first rule of gambling. And as much as it seems like investing, marijuana stocks are, for the most part, still more akin to gambling than investing. So, there are a number of reasons why you should stop rolling the dice and get your money back in your pocket before letting the rest ride.

In spite of the recent developments regarding legalization in Canada, there are still too many unknowns facing the industry to determine future growth and demand for the product. It is not entirely certain how the products are going to be taxed, priced, and controlled. Long-term demand trends will also not be easy to predict, and it will take time to determine how supply and demand will ebb and flow.

Financials are also not yet certain. Revenues are increasing for many of the companies in the space — there is no doubt. Aphria increased its revenues by over 100% in the latest quarter, Canopy increased it by the same, and Aurora increased its by over 200%. Sales are being made, and money is starting to roll in. But does this justify the prices at which these companies are currently trading?

Earnings seem to indicate the stocks may be overpriced. Both Aurora and Canopy are reporting earnings losses, with Canopy losing $0.40 a share and Aurora losing $0.04 a share. Aphria is the only company of the three reporting positive earnings of $0.08 a share. The companies are growing, so low earnings could indicate business investments that could be beneficial for long-term success. But it could also indicate a massive overpricing of these companies, which do not seem to justify the value placed upon them.

The current state of the cannabis market is, at present, still in its early stages. It is entirely possible that these companies will grow at a remarkable rate once legalization is complete and will make oodles of cash. The problem is that there is simply no way to know how much profit will be made and which companies will survive. If you keep all your money in these stocks, you are simply gambling on a winner, and you might just lose it all.

If you have made some money, sell half, get some money back, and let the rest ride on whatever pony you think has the best chance in this new and burgeoning market of marijuana investment.

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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Kris Knutson has no position in any of the stocks mentioned.

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