Marijuana Mania: The Bubble Is Here

Written by Luke Burgess
Posted September 26, 2018 at 4:23PM

Cannabis stocks are the hottest things on Wall Street right now. But should you be a buyer?

Absolutely not!

In fact, you should probably be selling any pot stocks in your portfolio...

Cannabis Stocks in a Bubble?

The cannabis market has exploded. And the market valuations for weed stocks are out of control.

Shares of Canopy Growth Corporation (NYSE: CGC), the world's largest medical marijuana company by market cap, are up by over 550% in 12 months.

This puts Canopy at a more than $15 billion market cap right now. Of course, that's not an incredibly high market cap for such a well-known company. But here's the kicker: Estimates suggest that the global medical marijuana industry is only worth about $10 billion today.

That means Canopy's market cap is worth 50% more than the entire medical marijuana industry is worth. And it's only one company! There are hundreds today.

Sure, there are some projections that say the medical marijuana industry will be worth almost $150 billion by 2025. But I'm uncertain if I want to wait that long, particularly from a market that's not even 100% legal yet. Do you?

The North American Marijuana Index shows us a broader picture of cannabis market valuation. It's more than doubled since last year:

But okay, we're only talking about medical marijuana so far here. What about the recreational market? Surely more people will use cannabis for recreation than for medical reasons.

Well, that's true. But I believe the entire medical push was never anything more than a stepping-stone to recreational legalization. And I believe the market has long priced in recreational legalization. That's a bit of a problem.

You see, no one has any clue about what the supply-demand aspect for recreational cannabis will be. We can be sure that demand will be strong at first. But there's little precedent to base a demand projection on.

Will more people use recreational marijuana recreationally if it were legal? Probably. But I don't think anyone will become a significant consumer overnight. In other words, the folks who use marijuana now will be the same customers.

So, I think we're left with an overbought market. And with all the hype surrounding cannabis stocks right now, they're looking quite bubbly.

I personally want to see marijuana legalized for recreation. That's because I don't believe the government should have the right to tell people what they can and can't put into their own bodies. If you want to drink bleach, the government has no business telling you that you can't.

And I'd invest in a cannabis company with sound finances. But right now, marijuana mania has taken hold of the market.

Stay away for now.

Last year was the year to sell cryptocurrencies. This year is the year to sell cannabis. You can always reenter the market once you're out. But you never make any money investing until you hit that sell button.

Good investing,

Luke Burgess Signature

Luke Burgess
Contributing Editor, Park Avenue Digest

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