Yahoo Finance Is now the time to invest in cannabis stocks?
Canada legalised recreational cannabis use last week, becoming the second country to officially do so after Uruguay. So, is now a good time to invest in weed stock?
Well, not necessarily.
The expectation was that weed stocks would shoot up after Canada’s announcement, but the opposite happened.
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Canopy Growth, one of the largest weed stocks was down 6.85 per cent last Wednesday, with fellow pot stocks Aurora Cannabis and Aphria down 7.23 per cent and 6.08 per cent respectively.
Closer to home, Australia small caps Creso Pharma Ltd and Hydroponics Company Ltd issued ASX statements applauding Canada’s legalisation. Creso Pharma shares surged 13 per cent over the week and Hydoponics saw gains of nearly 3 per cent. Major players, Cann Group and Auscann Group were more subdued – with Cann Group up 1 per cent and Auscann Group down 1 per cent.
“There is no question that the marijuana market is big, with estimates ranging from $8 billion to $10 billion in Canada alone,” The Motley Fool commentator Karen Thomas said.
“The questions lie in the implementation of the business, strategies, profitability potential, and in the valuations of marijuana stocks.”
She explained investors often bid up stock prices before a positive event, like the legalisation of a previously illicit drug. However, once the event occurs, reality sets in and investors become more pragmatic and the stock falters.
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“I think investors may stop looking at marijuana stocks with rose-coloured glasses, and valuations will come back down to reality.”
MarketWatch analyst Nigam Arora described this as the “big Canadian marijuana nightmare”.
He said marijuana prices will likely decrease as a big portion of the marijuana market is commoditised, slashing the market capitalisation.
Arora argued the key to making money in the weed market is to take an international approach and invest in wellness solutions and marijuana-based treatments.
On the back of the weed investment craze, Yahoo Finance launched a Cannabis Stock Watchlist, tracking a few prominent players in marijuana stocks trading on the NASDAQ and the New York Stock Exchange.
What about Aussie investors?
While it’s reasonably straightforward for Aussie investors to gain exposure to the sector, there are serious risks that come with these stocks, Australia market strategist at Saxo Bank, Eleanor Creagh told Yahoo Finance.
“In terms of investing now, it’s a highly speculative sector so there are significant risks when buying these stocks. My personal feeling is that regardless of whether the marijuana industry, both recreational and medicinal, expands in the long term – the share prices we see today have been driven by a great deal of “hot money” entering the sector,” she said.
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“The majority of the marijuana companies are yet to turn a profit and trading on sky high multiples.”
She added that while there have been medicinal breakthroughs, the road to success for medicinals is “paved with obstacles”.
Continuing, Creagh said she isn’t a naysayer, but warned investors against speculation.
“The current share prices are being driven by pure speculation and as quickly as they run up, the quicker they can fall as hot money leaves the sector,” she said.
“Any group of stocks trading on huge multiples with such exponential returns, before even turning a profit are entering bubble territory and therefore a risky investment. I would liken this year’s run up in pot stocks to the bitcoin hype last year.
“In my opinion, they make a better short selling opportunity!”
