This week saw yet another state – California – implement the legalized recreational marijuana retail sales. Canadian provinces are working toward the retail distribution and sales to begin this summer, nation-wide. With this newly created industry booming, many investors are wanting to jump on the cannabis bandwagon, purchasing stock in producers such as Canopy Growth Inc (formerly Tweed Inc) based in Smiths Falls, Ontario.
The problem with this bandwagon?
The valuation of these cannabis producing companies’ stocks are based on pricing that still isn’t clear, so profits won’t be clear until being rolled out to cannabis retailers later this year. The market cap total of all these companies, analysts say, is more than the industry will likely take – meaning the companies are expecting there to be more sales than analysts would bet on. What are the repercussions if these stocks are overvalued? These stocks will only go in one direction… negative. Buying in now would be risky. Waiting until the retail sales begin and level off would be more prudent for a long-time investor.
Possibilities for the industry are great – and the potential challenges, I would say, match those possibilities. Yes, the availability of recreational marijuana creates a whole new industry with jobs, regulated substance purchase and use, and could spin off secondary industries having to do with the experience of marijuana, edibles, etc.
A challenge is that the next government could undo the entire industry by stepping back the legislation. Although it wouldn’t be able to happen overnight, and the tax revenue would be difficult to replace (to both Canada and the provinces), it could happen. The effect for those companies and their stock prices would be detrimental to investors.
Don’t be in a hurry to invest unless you’re willing to lose that investment. Yes, you could try to time the market, exiting when the stock is at its peak, but that generally (and historically) doesn’t work for most retail investors. Patience is a virtue… and if the industry sticks there will be even further opportunity for stable investing and growth in cannabis producing company stocks.