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Why the marijuana sector is at risk of becoming a joke

Are you on board the marijuana express yet? It’s not too late to catch a ride – or to jump off, which may be the more prudent course of action. Investors have watched with a little envy, and perhaps more than a little disbelief, as companies involved in the marijuana sector have rocketed skywards over the past 3 months:

Auscann Group Holdings Ltd (ASX: AC8) – up 315% from listing price of 20 cents

Creso Pharma Ltd (ASX: CPH) – up 198%

MMJ Phytotech Ltd (ASX: MMJ) – up 143%

MGC Pharmaceuticals Ltd (ASX: MXC) – up 93%

Stemcell United Ltd (ASX: SCU) – up 1,515%

Zelda Therapeutics Ltd (ASX: ZLD) – up 95%

Queensland Bauxite Ltd (ASX: QBL) – up 243%

Wait…what?

Yep. The marijuana sector is so attractive that miners are purchasing marijuana companies and getting licenses to plant marijuana. Incidentally, Queensland Bauxite was queried by the ASX over some suspicious share trading that occurred before its recent announcement, but that’s a story for another day.

It is for these reasons that the marijuana sector could be shaping up as a bit of a joke – with unfortunately dire consequences for investors. When a mining company – with (apparently) promising bauxite prospects in Queensland – seeks to reinvest itself as a marijuana grower, investors have to ask themselves what’s really going on.

The burning need for every man and his dog to own a piece of the marijuana industry is reminiscent of recent booms in graphite, lithium, and baby formula, among others. Baby formula was at least mostly underpinned by actual demand, and the bigger companies in that sector have real profits. Unfortunately, many previous boom-time companies have little to show for their efforts, despite their popularity back in the day.

From the outside, the marijuana industry looks very fragmented and in my opinion it will prove difficult for any one player to achieve ascendancy. Likely most companies will either go bankrupt, be bought out, or wind up as low-margin contract suppliers to bigger companies that own the intellectual property and the brand names. It might be time to step outside for a breath of fresh air.

Speaking for myself, I would buy the following 3 companies over a marijuana stock any day of the year:

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Motley Fool contributor Sean O'Neill has no position in any stocks mentioned. 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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