The Dark Side of Marijuana Stocks
The Motley Fool
Published May 13, 2019 07:50
Updated May 13, 2019 08:07
Marijuana stocks are among the most fashionable investments on the TSX. With some stocks in the sector up as much as 70% year to date, they’ve been beating the market with ease. If you’d invested $1,000 in Canopy Growth three years ago, you’d have $23,000 in the bank today — and that’s not the only marijuana stock that has made investors rich. The weed sector as a whole has been beating the market and making many investors happy in the process.
However, all is not well in weed land. In addition to those investors who have gotten rich investing in Canopy and similar stocks, there are those investors who have lost it all buying the wrong weed stock at the wrong time. In addition, there are some reasons for skepticism toward the entire marijuana sector — skepticism that even the best companies in the industry should not be exempt from. We can start by looking at one of the most obvious problems facing the sector as a whole.
Sky-high valuations You’re probably aware that marijuana stocks are expensive. Growth sectors usually tend to have high P/E ratios, and there’s no reason for marijuana to be the exception. However, the valuations in this particular sector are really something else. Tilray, for example, currently trades at 111 times sales — and that’s after months and months of its stock tanking. Other top stocks in the sector have price/sales ratios as high as 140 and price-to-book ratios well over 10.
These are nosebleed prices that can only be justified by continued growth. And while marijuana stocks have indeed been growing revenue at a rapid pace, there’s some uncertainty as to whether domestic weed sales will remain strong after the initial novelty of legalization wears off. This concern is justified by reports that some weed smokers are returning to black market dealers, who offer lower prices, and by the fact that Aphria (TSX:APHA)(NYSE:APHA) reported a decline in recreational sales in its most recent quarter.
Acquisition uncertainty Speaking of Aphria, its recent history demonstrates yet another concern area for marijuana stocks: acquisitions. In recent months, cannabis producers have been gobbling up their competitors in a furious scramble to capture market share and intellectual property. The problem is that many of these acquisitions added no revenue or earnings power to the acquiring companies.
Get The App
Aphria was particularly harshly criticized for how much it paid for some of its acquisitions last year, which formed the basis for a short attack against the company. Aphria shares eventually rebounded after the short attack subsided, but the big question remains.
Foolish takeaway Marijuana, like any other sector, will probably see some big winners and big losers in the years ahead. Right now, it’s hard to say exactly what will happen. However, we’re already beginning to see the fortunes of the big-name companies starting to diverge, which makes it easier to tell which weed stocks to avoid.
Fool contributor Andrew Button has no position in any of the stocks mentioned.
The Motley Fool’s purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool Canada’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Motley Fool Canada 2019
This Article Was First Published on The Motley Fool
Written By: The Motley Fool
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.