A money manager explains why buying 'pick-and-shovela?? stocks is the best way to play with the 'green rush'

Barbara Corbellini Duarte/Business Insider

High-flying and volatile cannabis stocks have caught the attention of both the Main street and Wall Street this year.

Recently, Canada became the second country to legalize recreational cannabis and Michigan joined nine states and Washington, DC, in allowing full use of marijuana.

Money manager Ken Mahoney explains why 'pick-and-shovel' companies are a great way to take advantage of the opportunities that cannabis brings while avoiding the volatility of weed stocks.

High-flying and volatile cannabis stocks have caught the attention of both the Main Street and Wall Street this year, especially as Canada and the Michigan have recently legalized the recreational use of marijuana. While traders are embracing the opportunities of the "green rush," they should be aware of the high volatility of pot stocks, said Ken Mahoney, CEO of the New-York based Mahoney Asset Management. "When there is a lot of excitement about it, I get worried because the valuations are stretched," Mahoney said. "People don't do enough homework before they invest." Mahoney, who offers clients retirement solutions, says his experience shows smaller investors always end up in the wrong direction when a new concept comes to the market because there's always a high level of uncertainty. "It's hard to find the ultimate winner," he said. "It's hard to be the stock picker." So, instead of buying individual cannabis stocks such as Tilray, Aphria, Cronos Group, Aurora Cannabis and Canopy Growth, Mahoney recommends using a "pick-and-shovel" strategy, which involves investing in the underlying technology needed to produce cannabis, rather than in the final product. According to Mahoney, most weed stocks are new to the market and don't have a record of revenues and profits to support their "outrageous valuations." However, old "pick-and-shovel" companies, which provide solutions, such as fertilizing, real estate, and packaging for marijuana producers, already have a well-established business and can capitalize on the opportunities that cannabis brings. Below Mahoney gives four stock picks and explains why he likes them:
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