Legalization and the Stock Market

Legalization is happening in Canada and pot stocks are on the rise. At times last year, some of the discount brokerage platforms were so bogged down with customer orders for these stocks that they had to shut down temporarily.

If you’re reading this, then you obviously don’t have a moral problem investing in pot stocks. In fact, I think it’ll be interesting to see how the Socially Responsible Investing community treats these stocks. Will they be lumped in with big tobacco and alcohol as vices, or will their medicinal benefits carry the day as a benefit to society? I think I have an idea where that will land but we’ll have to wait and see.

Before we dive in, let’s be honest for a second. The only reason most people are even considering buying these stocks is because of how much they’ve already gone up. That’s true for most bubbles actually. When prices rise, more people notice, which makes them rise even more in a virtuous cycle. That phenomenon alone warrants caution.

To give you an idea of how “high” these stocks have flown, let me give you some of the numbers. Aurora Cannabis and Canopy Growth are the largest two pot stocks in the Canadian market. In the last year for which they reported earnings, they made $18 million and $40 million in revenue respectively. Now, that’s not nothing. However, the value of their outstanding stock is $4.6 billion and $5.6 billion. That’s 95 and 65 times the value of their revenues. Normal pharmaceutical stocks trade around 3.5 to 5 times their revenues!

But wait. Isn’t there going to be an enormous consumer market for marijuana once it becomes legal? I don’t doubt that there will be, but you do need to step back and ask yourself how big for a minute. I would argue that these companies are trading at prices that suggest that the marijuana market will rival the cigarette market, that the current handful of companies are going to capture the entire market, and that it’s already being sold today!

The Regulations You Need to Jump Through for Pot Stocks

Now I haven’t even talked about some of the risks that these companies face. First of all, the path to legalization is far from straight. There will be plenty of regulatory hurdles to jump through before any of these companies start selling in any real volume. Second, there will be massive competition from large and established tobacco companies and big pharma companies. Who knows which of today’s pot stocks will still be around in five or ten years?

Listen, I’m not saying you shouldn’t have any fun here. Like all good things you shouldn’t consume, a little bit in moderation won’t hurt you. The same goes for marijuana stocks. If you want to play with them, do it in a side account with just a few bucks. Just don’t bet your retirement on what might become no more than a Purple Haze!