Are Canadian Cannabis Stocks Too High?

Cannabis trade is very popular and unpredictable.

Canadian cannabis stocks
Graph by 3dman_eu; Leaf by cheifyc via Pixabay

Now that marijuana is set to go fully legal in Canada in the coming weeks, investors are flooding the market in hopes of cashing in on the next big thing. This influx in capital, which is being poured into leading cannabis firms, like Canopy, Tilray, Aurora and Aphria, is driving up the price-to-sales ratio of these companies to the point of greatly surpassing leading companies in the S&P 500. It has created a situation a bit reminiscent of the dot-com boom, according to a recent report from Bloomberg. And it is making some folks nervous.

While the cannabis trade is making a lot of noise right now, it is still very much an unpredictable business sector. Canada is set to launch its nationwide recreational pot market in mid-October, yet the United States government does not appear to be anywhere close to following suit. Nobody has any idea when or if this will change in the next year or ten years.

Nevertheless, there is a green rush happening that has allowed cannabis companies to rake in investments – many of them are now worth billions of dollars (on paper). Yet, financial experts say “the valuations are off the charts if you use any type of typical metrics.” Their profit-to-sales ratios, in many cases, are over 20 times higher than Amazon and Apple. This means these hot shot cannabis companies could be overpriced.

Despite what is happening in Canada with respect to legal weed, the true stability of cannabis investments hinges on what is happening in the United States. As it stands, President Trump has said he would “probably” support a bill (STATES Act) aimed at giving states the freedom to legalize the leaf without federal interference, yet Congress has not once given the issue any consideration.

In fact, leaders in both the House and Senate remain adamantly opposed to cannabis reform. And because of this, no legislation designed to drag pot out of the trenches of prohibition has so much as received a hearing. Never mind that U.S. Attorney General Jeff Sessions has a raging disdain for the plant, the movement and its fully legal status in nine states, or the fact that there is apparently now a White House committee pushing to reverse the public’s opinion on marijuana. It’s good to be optimistic, but we’re sorry to say that nationwide marijuana reform is going nowhere in the U.S. at this juncture.

Still, despite all of the legal and political conflicts, consumer spending on weed could hit $32 billion within the next few years, according to Arcview Market Research and BDS Analytics.

Sadly, the cannabis trade is not getting investors rich – not yet. And it could be awhile before that happens. None of the leading cannabis companies are pulling in sales that are even comparable to their overall “value.” For example: Aurora, valued at $6.4 billion, posted $12.2 million in sales during the last quarter. This is expected to change to some degree once Canada’s recreational market becomes official, but even that might not be enough for these companies to make a showing that pleases investors. The big payoff can only come after legalization goes widespread at the international level, some experts say. That’s when the situation gets serious and potentially profitable for those people who find themselves in the right stock at the right time. But it is impossible, at this point, to predict which cannabis firms will become the Apple and Amazon of their sector… or even which will still be left standing before the market matures.

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