Why decriminalization of marijuana and investment by big Canadian names doesn’t change our opinion of Canadian Marijuana stocks
Interest in Canadian marijuana stocks stems from last fall’s legalization of recreational cannabis. Today, investors continue to search for ways to tap in to those sales and profit from future growth. The federal government’s legislation has already spurred marijuana production and caught the investment interest of large companies such as Molson Coors and Constellation Brands. While we believe there is potential there for aggressive investors, determining which of today’s producers will become tomorrow’s leaders remains challenging. Regardless, investors need to remain wary of overvalued Canadian marijuana stocks and potential stock promotions.
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The federal government introduced its bill to legalize recreational marijuana use in April 2017. That new law came into force on Oct. 17, 2018, and provincial governments have, in turn, laid out their own laws for the distribution and sale of the drug.
In that time, Canadian marijuana stocks have been marked by a high level of volatility. U.S. states, such as Colorado, have already decriminalized or legalized marijuana use and authorize legal production and sale of the plant. Other U.S. jurisdictions, such as California, have only just joined them, having started January 1, 2018.
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, more big producers, including tobacco companies, will enter the market and take sales away from small growers.
Longer term, the continued expansion of the marijuana industry in Canada threatens established licensed producers. They benefit from a heavily regulated market where barriers to entry are high.
These stocks have high “market caps” (the value of all shares outstanding), in relation to their 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 remain up significantly from mid-2016 levels. Their speculative appeal continues to attract investors looking for a ground-floor opportunity. However, the pioneers in an industry are not always the ones who survive. Investors need to ongoing research on these stocks, the industry and markets both here in Canada as well as the U.S. and globally. That kind of ongoing, deep analysis is the focus of our TSI Cannabis Bulletinsadvisory.
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 continue to see highly speculative “pot-of-gold” penny stock promotions, especially in the U.S. 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 originally published in 2016 and is regularly updated.
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