With cannabis across North America becoming increasingly legal and accessible, it’s no surprise that the stock market has come alive on the matter. And this is particularly significant for the Canadian cannabis industry, where it’s recently become legal for medicinal and recreational use across the country.
But without a true precedent, it’s difficult to tell whether increased stock market activity is a reflection of true growth potential or whether it’s a cannabis stock bubble moments away from bursting.
If you’re interested in making thoughtful predictions about the future growth of Canadian cannabis, it’s important to first gauge where things stand in the Canadian cannabis industry at present.
Current value as it stands
According to Bloomberg, after starting from nearly zero, the value of 26 marijuana stocks listed in Canada has grown to nearly C$4 billion ($3 billion) in just the past two years, and it’s largely due to investors betting on the financial potential of the country’s move toward federally legalizing recreational use.
However, some are arguing that these large bets are problematic because the surge in the stock market people are seeing is fueled more by speculation rather than precedent, which is causing concern about whether these companies are being overvalued.
If cannabis is legal and consumer interest is growing, why should investors be concerned?
For one thing, both medicinal and recreational Canadian cannabis are accompanied by a number of laws that are limiting for distributors and retailers. Advertising and promotion are virtually banned, and all cannabis products are being heavily taxed and highly controlled by the government. Factors such as these will almost certainly impact the rate at which the cannabis market grows; the question is how much.
When compared to the United States, the Canadian cannabis industry is considered by some experts to have stronger immediate growth potential due to its federal recreational legalization, with some predicting that there could be 3.8 million recreational users by 2021 and multiple billions in sales. However, as mentioned, investors should remain cautious as there are a number of policy restrictions and limitations in place that could impact these predictions.
With regard to the growth rate of the U.S. cannabis industry, federal law continues to deem the drug a Schedule I narcotic alongside heroin and LSD, which puts increased regulatory limits and high risks on U.S.-based companies looking to develop. Still, analysts are optimistic, stating that the United States' marijuana market is projected to reach $50 billion by 2026.
Canadian Public Licensed Cannabis Producers
Despite a healthy dose of market optimism in both countries, some fear the valuations might be overestimations as few of them are proven, with most based heavily on hope and conjecture. In other words, neither has historical data to lean on, and with policies, regulations and legality continually evolving, it’s difficult to feel confident about the accuracy of the numbers.
Furthermore, when assessing the strength of both markets, it’s also important to keep in mind that Canada is the only "pure play” country, meaning that marijuana is legalized, both medically and recreationally, on a federal level as opposed to the state-controlled U.S.
But even with some analysts’ concerns about overvaluation, the market is expected to grow considerably, and there’s no debate on the fact that both volume and prices are continuing to rise.
When all is said and done, investing in the Canadian cannabis industry certainly has the potential to be successful in the long-term, but investors should take care to use precautions when purchasing. For example, diversifying portfolios across several Canadian companies rather than focusing on a single one. Additionally, diversification outside of Canada and into the United States and other markets will help minimize risks. And finally, investors should also pay close attention to results, events, and news surrounding the industry as the market for Canadian cannabis is particularity susceptible to change and volatility due to its unprecedented nature.