Could pot stocks make you rich?
Canadians won’t be able to buy recreational marijuana until Oct. 17, but investors have already gotten a high from Ottawa’s decision to legalize pot.
Cannabis stocks have been among Canada’s best-performing stocks in 2017. Canopy Growth and Aurora Cannabis, the country’s major publicly-traded marijuana juggernauts, are now valued at $8 billion and $5 billion respectively. Taken together, they’re worth more than Canadian Tire, whose market capitalization is around $11.6 billion, according to Bloomberg data.
If you’d invested in either Canopy or Aurora a year ago, you could have easily reaped Bitcoin-like returns.
But as the legalization date nears, concerns are mounting that cannabis stock prices could take a dive, as legal marijuana for adult use hits the shelves and actual data starts to trickle in about customer demand and profit margins.
“There are two main things that drive stock prices. One is value, the other is speculation,” said Brad Poulos, a cannabis business expert and lecturer at Ryerson University.
“Right now the cannabis market is primarily, if not fully, fuelled by speculation.”
Is it too late for Canadians who’ve just learned about marijuana stocks to join the party?
WATCH: Canadians won’t be able to buy recreational marijuana legally until October 17. But you can already invest in pot. Erica Alini looks at whether cannabis stocks are a solid bet or a fragile bubble.
The Canadian recreational market: Government buyers and supply problems
One of the concerns is that Canada’s pot industry might be headed for for couple of — excuse the pun — major potholes after Oct. 17.
The first is the fact that in almost all of Canada, licensed producers would have to sell to provincial and territorial governments, not directly to Canadians.
While consumers will be buying through a mix of private retailers, licensed stores or government-run facilities, in most jurisdictions, distribution is in the hands of the province or territory.
And governments will “drive a hard bargain,” much like the Liquor Control Board of Ontario currently does with winemakers, said Allan Gregory, professor of economics at Queen’s University.
But unlike with wine, according to Gregory, governments will have an added motivation to drive down wholesale prices: They won’t have much latitude to raise consumer prices, which would give dealers on the black market the edge.
Saskatchewan, which seems intent on allowing private cannabis wholesalers, might be the sole exception to this, Gregory added.
WATCH: Legal marijuana will arrive October 17, but Sask. retail outlets might not be ready
The second bump in the road could come in the form a temporary oversupply problem.
Poulos expects Canada’s aggregate consumption of both medical and recreational cannabis to be around 1 million kg per year. But the current on-stream or planned capacity of marijuana producers is around twice that much, he estimates.
“Not enough uptake of cannabis could cause a [stock price] correction,” he said. Still, he added, it could take months, if not years, for it to happen.
At the helm of Canopy Growth, Bruce Linton appears unfazed by talk of too much marijuana.
“There will be a massive undersupply in 2018,” he predicted, speaking with Global News in a phone interview.
He does see an oversupply problem, but not until 2020 — and by then, Canadians will likely be allowed to buy derivative cannabis products like edibles and beverages, too.
That’s where Linton see the bigger potential for recreational market, especially as far as anything that comes in drinkable form.
“People watch their calories,” he said, which is why he expects more consumers will gravitate towards marijuana-infused brews than weed brownies.
The oversupply issue, he added, will mostly hit upstarts that produce cannabis flower.
And size and diversification also shield the larger producers when it comes to haggling over price with the government, he said.
Medical marijuana is likely the real deal
No matter how things unfold after Oct. 17, the Canadian market, with its 36 million consumers, isn’t large enough to generate the billions of dollars in profits that would justify the current industry valuations, Poulos said.
Europe, on the other hand, which has almost a billion people and is showing a growing interest in medical marijuana, could do the trick.
“It’s the export market that could be the saving grace,” Poulos said.
Canada is ahead of the curve when it comes to regulating medical marijuana, he added.
While Health Canada has developed detailed regulations for licensed medical marijauna producers, “inexplicably” large European countries that allow the use of cannabis for medical purposes, like Germany, have not.
This has given Canada a unique opportunity to corner the global market for medical marijuana, both Poulos and Gregory told Global News.
‘Not for the faint of heart’
While there may be a case for certain cannabis investments, the era of easy money might be over, Gregory said.
And even though he expects the top publicly traded producers to fare better than smaller upstarts, investors are in for a rough ride, he predicted.
In general, he warned, cannabis stocks are “not an investment product for the faint of heart.” Even the large publicly-traded producers often see intraday stock price swings of five to eight per cent, he noted.
“I won’t say every marijuana stock is going to fall,” he said, “but the losers will outweigh the winners.”
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