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Why Are Canadian Cannabis Stocks Soaring? Is It A Bubble?

Canada is mere months away from full-on cannabis legalization for adult recreational use. Most Canadians are eagerly counting down the days — and the early investors in the industry are eagerly counting their money.

North of the border, stock prices are soaring for companies in the cannabis sector. But some cautious investors are warning of a possible “weed bubble,” according to a report in this week’s Barron’s.

According to the cover story written by Bill Alpert:

One analyst who has studied that opportunity is Daniel Pearlstein of Eight Capital, a tiny Toronto brokerage firm. He’s a bull, convinced that cannabis presents investors with a once-in-a-lifetime chance to get in on an industry that will boom like the internet.

“This is a market that is simply way bigger than a lot of people believe,” he contends.

How big? About $9 billion a year, Pearlstein estimates. Colorado has a sixth of Canada’s population, he notes, and the state’s cannabis sales reached $1.5 billion in its fourth year of legalization. So Pearlstein multiplies Colorado sales by six. And, of course, there are countries with potential markets bigger than Canada’s. Pearlstein believes that federal legalization gives the U.S.’s northern neighbor a head start to becoming the world’s preferred supplier.

Alpert reports that cannabis stocks in Canada are valued at more than $30 billion, about half the market capitalization of the nation’s gold mining industry.

The Barron’s report took a look at some of the market’s big winners in terms of market capitalization (dollar amounts reflect Canadian currency):

  • Canopy Growth Corp.: $6.7 billion, with 69 million in revenue over the past 12 months.
  • Aurora Cannabis Inc.: $4.5 billion with 2017 revenue of $31.1 million.
  • Aphria Inc.: $2.4 billion with 2017 revenue of $25.5 million.

The reason some investors are jittery is that there is an oversupply of cannabis currently flooding the market. Once the recreational market settles down after the July launch, these “bears” predict a market correction.

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