Statistics Canada estimates 5.4 million people will spend up to a combined $1.018 billion on legal cannabis in the final quarter of 2018; but if you’re reading that as a sign to invest in cannabis, you’re already behind the eight ball.
“There’s an old adage ‘if you’re getting stock advice from your lawyer, don’t buy. Sell.’ By the time it’s getting around as common knowledge it’s too late, you’ve missed the boat. You’re better off in many cases shorting,” University of Regina associate professor of economics Jason Childs said.
For the past three days cannabis stocks have been the most traded stock on the TSX, the TSX Venture Exchange and the Canadian Stock Exchange.
“When I first started doing this I maybe had a few stocks on my screen. Today, I have over ten each with over 20 stocks on each screen, all cannabis related,” Steve Feldman an investor and trader who runs the popular Twitter handle @CanadaPotStocks said.
Feldman has been investing for over 25 years, but he says the excitement around cannabis, and the people driving it, is something rarely seen.
“There are a lot of new investors coming to into this stage and a lot of them don’t even really know a lot of the basics or simple terms,” he said.
“Some of these people are doing their homework, but a lot of them aren’t. They’re just throwing a bunch of money at the wall and hoping some of it sticks,” Childs added.
It’s been a wild week for the cannabis market. Nanaimo based Tilray Inc.’s stock jumped over 90 per cent on Wednesday, before dropping 50 per cent the same day; a microcosm of the market’s volatility.
“There’s a lot of forward pricing that goes into this. In my opinion you’re starting to get priced to perfection. Their valuations are already so high that any miss or slip in that thesis could see a correction in these stocks,” Feldman cautioned.
“If you have some really solid information about whose going to have the right product mix at the right price points – that sort of thing – there’s still some room, but there’s not a lot. A lot of these firms aren’t going to be as profitable as people expect, especially over the near term,” Childs agreed.
Both Childs and Feldman agree the biggest issue is figuring out which company offers the best product, noting that it’s the pot that will make the company.
“It’s not like you can be a cookie jar investor. Their whole investment strategy was to buy products they liked and knew were good. We can’t do that because if you try and go and sample the product you’re at risk of being arrested,” Childs explained.
“We’re basically talking about a burger stand or a new chain that’s come out across Canada, and no one is really talking about the burger. At the end of the day, this will be a consumer product, the consumer has to like the product, they have to want to purchase the product, and companies are going to have to put out product that people want to buy,” Feldman added.
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Adding to that challenge is the fact that the already established market understands what its base wants, giving it a competitive edge over legal cannabis.
“We don’t know much about consumer preferences in this industry. We don’t know how many consumers are going to switch from their current providers to legal providers. We just don’t know,” Childs continued.
Stats Canada estimates as many as 1.7 million people will continue to use illegal cannabis in Q4 of 2018, the equivalent of up to $317 million.
All this uncertainty doesn’t mean there isn’t money to be made; it just comes down to who.
“My guess is there’s probably only room for two, three maybe as many as half a dozen big players and everyone else is going to fall by the wayside,” Childs said.
Which means there’s as much to lose as there is to gain.
“We don’t know who’s going to win, so we’re guessing. Any time you’re guessing, money’s at risk,” he stated.