As the legalization of marijuana in Canada approaches later this month you may be wondering if these high-flying stocks should find a place in your investment portfolio. You may have heard that your neighbour just made 45% last month on their cannabis stock. This might be true, but the high may be almost over. Much of the money made on these stocks was driven by speculation; the Canadian Marijuana Index has risen over 500% since 2015.* Going forward, investors need to focus on fundamentals for future profits. Setting aside any personal bias as to whether marijuana should be legalized, let’s look at whether it's a good investment.
Many of these companies have a viable plan but it will take time to turn a profit. The Canadian market cannot sustain them all, and exporting is pretty much non-existent. Edibles and oils, two key lines of business, won’t be legal in Canada for another year. Not all of them will survive. As these companies are in the production stage, they need to guess at what they will be able to sell. Like other companies, the stock price will fluctuate based on estimated versus actual earnings. If they fall short, we will see stock prices drop dramatically. Legal dispensaries will need to be able to compete on cost as well as quality and product offerings. Current cannabis users are unlikely to give up their current suppliers or stop growing it themselves. If they can continue to buy it cheaper and have it delivered to their door, it may take years before they turn to legal shops for their supply. Consider that alcohol-related companies trade at around 10 times actual earnings. Currently, some cannabis stocks are trading at 150 times ESTIMATED earnings. This means there is a lot of room for the stock price to fall.
While there may be potential in this sector, investors should wait out the next year before jumping in. Right now you aren’t investing, you are speculating - and may the quickest trader win. Before you pump money into riskier investments, let’s get together and talk about the risk/reward ratio of various investments to meet your short- and long-term goals.
This information has been prepared by Terry Lynn Adamson who is a Senior Investment Advisor for HollisWealth®. Opinions expressed in this article are those of the Investment Advisor only and do not necessarily reflect those of HollisWealth. HollisWealth® is a division of Industrial Alliance Securities Inc., a member of the Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada.