Thursday, 16 March 2017

Marijuana Stocks in Canada

The last few months have revealed that a lot of investors have gotten onboard the Marijuana wave.  Marijuana stocks such as Canopy Growth Corp (WEED.TO) have been touted as the next "can't miss" investment in North American and especially in Canada where the Federal Government will sometime in 2017 announced that selling weed will be legal.

Estimates vary but the size of the Marijuana market in Canada is estimated to be between $15 to $25 Billion each year.

Despite the hype, a prudent investor needs to understand where they are putting their money.  Here are some reasons to consider before investing in weed:

Excessive valuations

Canopy Growth Corp is valued at $1.8 Billion and was just recently added to the TSX Composite Index which will add fuel to the valuation going forward.  But Canopy is a very expensive stock right now, it did $30 Million in sales in the last 12 months and this gives it a P/E ratio of 60 times.  Now using the P/E ratio on a risky stock really doesn't apply and also to compare it to other stocks in the same category again does not work.  Canopy is going into uncharted waters with such a lofty valuation based on "what might happen" in the future.  If something goes wrong where what happens does not exactly happen that way, what would become of this stock.

Analysts have predicted, even if the Federal government passes legislation legalizing Marijuana, it could take at least 2 years for Canopy to make a profit.

Old saying

There is a very interesting term in investing called "buy the rumour, sell the news".  I actually have seen this happen a few hundred times.

When the Trudeau government finally announces that Weed is legal, it may send the stock crashing down

Sin Stock

In Canada, there are not a lot of sin stocks to invest in.  In the States, there are casinos, brothels, cigarette producers, weapons manufacturers, alcohol, and prison stocks.   These are called sin stocks, where what they produce, service, or provide causes harm to someone somewhere.  If you value a stock to not harm anyone with your investment dollars then Marijuana stocks may not be for you.

Final Thoughts

It comes down to this.  Legal Marijuana will be big business in Canada, but that doesn't mean any of the pot producers will be good investments.  Currently Canopy Growth Crop (WEED) and Aurora Cannabis Inc (ACBFF) are trading at very lofty valuations similar to the tech stocks during the dot com craze.  Whenever there are such lofty valuations, no one knows which way the stock will go, up or down.