The only thing pot stocks will light up is your money

Marijuana stocks are the latest trend to excite investors on the ASX, with the likes of MMJ Phytotech Ltd (ASX: MMJ), Auscann Group Holdings Ltd (ASX: AC8), and Creso Pharma Ltd (ASX: CPH) capturing the market’s imagination in a way that this chart demonstrates vividly:

source: Google Finance

source: Google Finance

Unfortunately, none of these companies appears to be investment grade, and current movements appear to be driven by short-term opportunists gambling on higher prices. The price of each company does not reflect its current business prospects in my opinion. Or, to put it another way, investors are paying a high price now for an uncertain future that contains many challenges. Regulatory approvals are a positive, but companies face other issues including keeping manufacturing costs under control, and scaling up sales enough to cover back office and executive costs.

Indeed, shares in MMJ Phytotech have plunged 14% this morning, after hitting an all-time high of $0.75 just yesterday. Auscann shares have also fallen 5% and I doubt that we have seen the end of price volatility in the sector.

Yes, over the long term, the marijuana market opportunity might be a big one. Yet there are already more than 3 Australian pot stocks listed, plus numerous others in jurisdictions around the world. Here is a 2014 article from Forbes detailing 8 more listed marijuana companies that are likely chasing opportunities in the exact same markets as Auscann and MMJ. To my mind the industry is too fragmented at present for any of the players to become a really big player, and it is uncertain if and/or how each of the companies will differentiate its products from the other. Many players could likely end up as little more than contracted suppliers, with a few holding the valuable intellectual property and big brand names.

So while marijuana ticks the ‘new and exciting’ box, it does not tick any of the boxes that would get me looking at it as a potential investment opportunity.

I would buy the following 3 businesses before a marijuana stock any day of the year:

Top 3 ASX Blue Chips To Buy In 2017

For many, blue chip stocks means stability, profitability and regular dividends, often full franked..

But knowing which blue chips to buy, and when, can often be fraught with danger.

The Motley Fool's in-house analyst team has poured over thousands of hours worth of proprietary research to bring you the names of "The Motley Fool's Top 3 Blue Chip Stocks for 2017."

Each one pays a fully franked dividend. Each one has not only grown its profits, but has also grown its dividend. One increased it by a whopping 33%, while another trades on a grossed up (fully franked) dividend yield of almost 7%.

If you're expecting to see the likes of Commonwealth Bank, Telstra and Wesfarmers shares on this list, you'll be sorely disappointed. Not only are their dividends growing at a snail's pace, their profits are under pressure too due to the increasing competitive environment.

The contrast to these "new breed" blue chips couldn't be greater... especially the very real prospect of significant share price gains, something that's looking less likely from the usual blue chip suspects.

The names of these Top 3 ASX Blue Chips are included in this specially prepared free report. But you will have to hurry. Depending on demand - and how quickly the share prices of these companies moves - we may be forced to remove this report.

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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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