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Why Investors in Canopy Growth Corp. Will Have a Bad Trip

Canopy Growth Corp. (TSX:CGC) has been rising by the day, and it seems that nothing can keep this stock from soaring to new highs each week. It’s clear that investors are euphoric over this stock, and they may be playing a very dangerous game by investing in marijuana stocks at these levels. I worry that most people who own shares right now may actually be speculators–not investors who are willing to stick around for the long term.

Canopy is a hot stock, and the business is actually well run, as the management team is very focused on branding. The company has some fantastic growth numbers, and this growth is only expected to accelerate as marijuana becomes legalized in Canada. These are very strong headwinds, and the proof is indeed in the pudding.

Valuation is a concern, volatility is off the charts

My concerns with owning the stock right now are not about the business itself, but with the valuation. The valuation is suspect right now, and, as we’ve seen with other high-flying, small-cap growth stocks, the party could be over very fast, and the euphoria will turn into a very bad trip for those still high on this stock.

Risk: Marijuana traders could start jumping out of the stock in herds

Of course, I could be wrong, and the stock could actually be stable and the rally sustainable, but a bubble is certainly possible. It’s difficult to truly value such a high-growing company like Canopy, but it’s very clear that marijuana investors are traders looking for huge short-term profits and can’t think past a time horizon of a few months.

We’ve seen this pattern before many times. One piece of bad news is enough to let the dominoes fall. The stakes are high right now with the stock trading way above reasonable valuations, even considering the incredible growth potential and opportunity taking a hold of a new market.

If you want to put money into this company at current levels, then keep in mind that you’re trading and not investing for the long term, because a margin of safety is not present. It’s a very speculative stock with traders that will send it off the charts.

But if you’re a huge risk taker and want a piece of the quick profits, then do so carefully, and make sure you put in what you can afford to lose, because you may very well lose most of it if things don’t go well. The stakes are the highest they’ve ever been, and volatility will continue to be off the charts going into 2017.

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Fool contributor Joey Frenette has no position in any stocks mentioned.

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