Opinion: Why the Marijuana Sector Is No Better Than Cryptocurrencies

After an incredible run, investors need to take money off the table for all marijuana stocks, including Canopy Growth Corp (TSX:WEED).

| More on:
The Motley Fool

You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

A bubble is most often defined as a period in the investment cycle when investors behave in an emotional manner, bidding up the price of an asset to such a level that it actually sells for substantially more than its intrinsic value. Like kids blowing bubbles into a glass of chocolate milk, investors may feel that the fun will go on forever. In almost all cases, however, the natural tendency is for bubbles to either deflate gradually or pop altogether.

To rationally consider shares in Canada’s marijuana stocks, we must first properly evaluate the situation.

Over the past month, shares of Canopy Growth Corp. (TSX:WEED), Canada’s largest marijuana grower, have increased by more than 100% after closing at slightly less than $40 per share on January 8, 2018. Clearly, investors have lost sight of the fundamentals of the business and the timing of things.

Although legalization is scheduled for halfway through the year, investors need to begin asking some difficult questions.

What is the P/E ratio, and what is the appropriate P/E ratio to pay for this stock?

Unfortunately, over the past four quarters, Canopy has lost money in each and every quarter, totaling losses of $0.47 per share. In addition, the company has burned through $22 million in cash over the past six months. On the cash flow statement, the cash flow from operations (CFO) for the entire 2017 fiscal year (ending March 31, 2017) is negative $27 million. Clearly, investors believe that there is potential in the future, but with no profit or even positive cash flow, it becomes very difficult to analyze this company.

So, what is this potential? Is it a patent? What is the product differentiation?

Unfortunately, there is no product differentiation for any producer, and there are no patents that would separate any marijuana company from the pack. The industry is composed of a number of companies that are competing over who can grow weed at the lowest cost. This product is really no more than a commodity.

As a reminder, many provinces allow for plants to be grown by individuals for purposes of personal consumption only.

Why have share prices increased so drastically in this industry?

As is sometimes the case, certain investors behave irrationally, and instead of being caught with their pants down, the stock goes even higher as the irrational behavior continues. In the process, the short sellers are forced to cover their positions and accept their losses, as the prices of shares in the industry continue to increase.

As Yogi Berra would say, “It’s déjà vu all over again.” In the year 2000, many investors saw this situation unfold in very much the same way in the technology industry. Companies with no way of justifying their share prices traded at exorbitant prices. At a price of almost $40 per share, Canopy has produced revenues of $57.85 million over the past four rolling quarters. With 168 million shares outstanding, if revenues were equal to profits, then there would be a total profit of $0.34 per share, and the P/E would be in excess of 115 times. Unfortunately, this is not the case. The situation is that a company, with trailing revenues of $57.85 million, has a market capitalization of more than $7 billion.

Which bubble will pop first: marijuana or cryptocurrency?

Should you invest $1,000 in Canopy Growth right now?

Before you buy stock in Canopy Growth, consider this:

The Motley Fool Stock Advisor Canada analyst team just identified what they believe are the Top Stocks for 2025 and Beyond for investors to buy now… and Canopy Growth wasn’t one of them. The Top Stocks that made the cut could potentially produce monster returns in the coming years.

Consider MercadoLibre, which we first recommended on January 8, 2014 ... if you invested $1,000 in the “eBay of Latin America” at the time of our recommendation, you’d have $20,697.16!*

Stock Advisor Canada provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month – one from Canada and one from the U.S. The Stock Advisor Canada service has outperformed the return of S&P/TSX Composite Index by 29 percentage points since 2013*.

See the Top Stocks * Returns as of 3/20/25

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Ryan Goldsman has no position in any of the stocks mentioned.

Confidently Navigate Market Volatility: Claim Your Free Report!

Feeling uneasy about the ups and downs of the stock market lately? You’re not alone. At The Motley Fool Canada, we get it — and we’re here to help. We’ve crafted an essential guide designed to help you through these uncertain times: "5-Step Checklist: How to Prepare Your Portfolio for Volatility."

Don't miss out on this opportunity for peace of mind. Just click below to learn how to receive your complimentary report today!

Get Our Free Report Today

More on Investing

a man celebrates his good fortune with a disco ball and confetti
Stocks for Beginners

Prediction: Here are the Most Promising Canadian Stocks for 2025

These Canadian stocks show some of the best growth outlooks out there, so don't ignore them any longer.

Read more »

concept of real estate evaluation
Dividend Stocks

Canadian Real Estate Stocks: How I’d Navigate This Sector With $15,000 During The Pullback

A $15,000 investment split among these two undervalued Canadian defensive REITs could generate high income yields with capital gains upside

Read more »

Digital background depicting innovative technologies in (AI) artificial systems, neural interfaces and internet machine learning technologies
Tech Stocks

3 Canadian Artificial Intelligence Stocks to Buy and Hold Until 2040

These three Canadian tech stocks to help you benefit from the surging demand for AI tech and infrastructure in the…

Read more »

money goes up and down in balance
Tech Stocks

Billionaires Are Selling Apple Stock and Buying This TSX Stock in Bulk

Billionaires might be dumping Apple stock after it lost over US$600 billion last week. But this other tech stock looks…

Read more »

A worker gives a business presentation.
Dividend Stocks

2 Canadian Dividend Stocks I’d Buy With $3,000 Whenever They Dip in Price

There's no shortage of great Canadian dividend stocks to buy, but these two pose huge upside right now for income…

Read more »

A train passes Morant's curve in Banff National Park in the Canadian Rockies.
Stocks for Beginners

Where Will CP Stock Be in 5 Years?

CP stock has been showing signs of real growth lately, but will that peter out in the next few years?

Read more »

A person looks at data on a screen
Investing

How I’d Position $7,500 in Canadian Value Stocks Despite Market Uncertainty

Air Canada is an example of a cheap value stock that's worth considering today despite the market uncertainty.

Read more »

Data center woman holding laptop
Tech Stocks

Better Tech Stock: Lightspeed Vs. Kinaxis?

These two tech stocks were once on top of the world, but after coming down in price, it might be…

Read more »