Why the introduction of new marijuana laws doesn’t change our opinion of Canadian Marijuana stocks
In the ramp up to Canada’s legalization of recreational cannabis use, readers are increasingly interested in related investment opportunities. While the federal government’s new legislation has already spurred marijuana production, we believe investors should remain wary of over-valued marijuana stocks and potential stock promotions.
The federal government introduced its bill to legalize recreational marijuana use in April 2017. It hopes to have that new legislation in place by July 2018. As you probably know, several U.S. states have already decriminalized or legalized marijuana use and have begun authorizing legal production and sale of the plant. Other U.S. jurisdictions are likely to follow.
Cannabis stocks are attracting investor interest as legalization continues. However, these companies sell into a limited and highly regulated market. As well, there are very low barriers to entry for new medical marijuana producers. If the market grows large and profitable enough, big producers, including tobacco companies, will likely enter the market and take sales away from small growers.
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Longer term, the federal government’s plans to expand the legalization of marijuana in Canada remains a considerable threat to licensed producers. They depend on a heavily regulated market.
These stocks have high “market caps” (the value of all shares outstanding), in relation to its current sales. That means they need substantial revenue growth to justify their current stock prices, let alone move higher. They also have unwarranted speculative appeal, and if revenues merely hold steady, their stock prices will be vulnerable.
Share prices of many Canadian marijuana producers have soared since mid-2016. Their speculative appeal has attracted investors looking for a ground-floor opportunity. However, the pioneers in an industry are not always the ones who survive. That’s worth remembering: think before you invest.
Charts for two of Canada’s biggest marijuana producers: Canopy Growth was the first Canadian marijuana stock to achieve a $1 billion valuation (in November 2016). Like Canopy and others, Aurora Cannabis, Canada’s third largest marijuana grower by market cap, saw its share price fall in April from its recent high. Marijuana stocks have yet to fully recover from those losses.
Investor bonus: Above all avoid “pot-of-gold” pennies if you invest in marijuana stocks
While the marijuana industry now has a number of established producers, in the early days of de-criminalization we saw many highly speculative “pot-of-gold” penny stock promotions. These typically arise in new industries.
We advise staying out of stock promotions of Canadian marijuana stocks businesses or anything else. They attract the wrong kind of people. Stock promotion is a take-the-money-and-run type of business. Most successful entrepreneurs value their reputations, and want to build a profitable, sustainable business that can pay off for investors. So, they generally go in to some other line of work, and stay out of stock promotion, which is a good thing in the stock market.
For a recent Canadian Business article seeking our views on marijuana stocks, click here.
For a CBC article in which Pat McKeough was interviewed on marijuana stocks, click here
How much interest do you now have in marijuana stocks now that Canada is on the verge of legalizing recreational use?
This article was initially published in November 2016 and last updated on June 23, 2017.
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