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Will Blackmores Limited follow Stemcell Utd Ltd into the cannabis sector?

The Stemcell Utd Ltd (ASX: SCU) share price doubled in early trade this morning as day traders and speculators continue to buy the stock with no regard to the company’s intrinsic valuation.

The shares were changing hands for more than a $1 this morning which would give it a market value around $364 million given the company has reported it has 364.6 million shares on issue as at December 31 2016.

Just last week the company’s shares sold for between 1 to 3 cents apiece, but since it announced an intention to investigate business opportunities in the medical cannabis space the stock has climbed more than 8,000% in under a week.

This kind of price action is being driven by short-term traders looking to turn a profit in the belief that they can sell a stock to somebody else for a price higher than what they paid for it due to the upward price momentum generated by the hype around the price momentum.

This is not a sensible investment strategy as the company itself generates nothing in the way of sales revenues and has no specific plan as to how it intends to develop or invest in the cannabis markets. So far all it has done is announce the appointment of a strategic adviser known as the “King of Cannabis” by industry journal High Times.

In reality the only thing higher than Sydney house prices at the moment are buyers of this stock given its crazy valuation and likelihood it will come crashing down to earth once the price momentum reverses.

If you’re interest in investing in the medical cannabis industry I would suggest avoiding the speculative end of the market that includes companies like MMJ Phytotech Ltd (ASX: MMJ), Zelda Therapeutics Ltd (ASX: ZLD), Auscann Group Holdings Ltd (ASX: AC8) and Creso Pharma Ltd (ASX: CPH).

Could Blackmores prove the real winner?

One profitable company with an excellent long-term track record and strong outlook that has recently flagged its firm interest in selling medical cannabis supplements is Blackmores Limited (ASX: BKL).

Given the keen investor interest in the sector I expect the company is working hard behind the scenes to develop plans for the sector as its chief executive has previously stated the company is looking into opportunities in the sector.

Importantly, Blackmores also has the balance sheet, distribution networks, and cash flows to credibly operate in the sector, unlike many of the speculative plays that are likely to need raise capital and face steep uphill battles to get anywhere near profitability.

I rate the vitamin maker’s shares a buy at prices less than $100 per share, whether or not it moves into the sector.

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Motley Fool contributor Tom Richardson owns shares of Blackmores Limited.

You can find Tom on Twitter @tommyr345

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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