Is There Any Upside Left for Pot Stocks?

With Canopy Growth Corp (TSX:WEED)(NYSE:CGC) already up 60% this year, is the stock still a good buy?

| More on:

Marijuana stocks were soaring last year, and although we’ve seen that pace slow down for much of 2018, it looks like the frenzy is gaining steam again now that the bill to legalize cannabis has been passed. Officially, Prime Minister Justin Trudeau announced that it would be mid-October when pot sales would commence, giving the provinces ample time to prepare for the sale and distribution of pot.

Pot stocks given a big boost

Legalization has certainly given struggling cannabis stocks new life, as even Aphria Inc. (TSX:APH), which has been struggling mightily this year, has risen more than 13% over the past five days of trading. Year-to-date the share price is still down 30% but it’s a welcome sign of bullishness for many investors that have likely been frustrated with the stock’s performance this year.

Aurora Cannabis Inc. (TSX:ACB) has also seen a similar increase in price, rising more than 16% during the same period, and it too has struggled this year after investors became concerned with the high price that the company paid for MedReleaf Corp. (TSX:LEAF).

Canopy Growth Corp. (TSX:WEED)(NYSE:CGC) is another stock that has gotten a boost from legalization, with its price rising around 20% in just the past five days as it closes in on $50. Year-to-date, Canopy Growth has risen more than 60%, and it’s been one of the top-performing pot stocks on the TSX this year.

Can the growth continue?

The big question cannabis investors should be asking is just how much more upside these stocks have given the strong returns we’ve already seen.

Pot stocks have been known for their obscene valuations in the past, so if Canopy Growth is trading 10 times its book value and more than 130 times sales, it doesn’t send off the same alarm bells that might be expected in other industries.

The danger of investing in a stock that has risen so much in value is buying at the peak, and that’s why speculative buying puts investors at risk, because the investment is valued based on potential (which sometimes isn’t grounded in reality) rather than on fundamentals. Investors only need to look at what’s happened with Bitcoin as an example of how quickly things can turn from bullish to bearish.

As a speculative buy, pot stocks could still generate great returns, but there’s also a lot of risk involved in investing in cannabis that shouldn’t be ignored. We’ve seen the industry been very reactive to news, and that in itself poses a big risk, as if we were to see a big legislative change south of the border that makes investors bearish on cannabis, then that could quickly send stocks reeling.

When fundamentals are not involved in investing, stocks can be more susceptible to external factors influencing their overall value, which puts investors at greater risk.

Bottom line

I don’t believe that we’ve reached the peak for pot stocks just yet, but that doesn’t make it any riskier to invest right now.  There’s still a lot of uncertainty in the industry relating to how strong demand will be and just how much of a factor the black market will play. For those reasons, pot stocks should be treated as highly-speculative buys.

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 David Jagielski has no position in any of the stocks mentioned.

More on Investing

Various Canadian dollars in gray pants pocket
Dividend Stocks

Need Passive Income? Turn $5,000 Into $23.85 Every Month

If you're looking for passive income that comes in like a paycheque, this dividend stock provides that to you along…

Read more »

A worker drinks out of a mug in an office.
Metals and Mining Stocks

5 Things to Know About Nutrien Stock in December 2022

Trading at heavily depressed multiples, Nutrien stock is a great opportunity, as it delivers solid financial results and an optimistic…

Read more »

A shopper makes purchases from an online store.
Tech Stocks

Shopify Stock Rose 15% in November: Is it a Buy Today?

Shopify (TSX:SHOP) stock rallied 15% this month but is still down 69% year to date, so should investors worry that…

Read more »

Man holding magnifying glass over a document

The 3 Most Oversold TSX Stocks to Watch Before 2023

Many oversold stocks are merely victims of market circumstances and potentially profitable bargains when they seem downtrodden.

Read more »

Silver coins fall into a piggy bank.
Dividend Stocks

A TFSA Contribution Room of $88,000 and 1 Dividend Aristocrat Can Make You $172,330 Richer

A high-yield Dividend Aristocrat in the energy sector is a suitable holding for Canadians with $88,000 available contribution rooms in…

Read more »

Upwards momentum

Year-End Sales Tracker: 3 Growth Stocks Going for Value Prices

Growth stocks like Aritzia (TSX:ATZ) are on discount.

Read more »

Dollar symbol and Canadian flag on keyboard

2 Canadian Stocks I’ll Be Buying Hand Over Fist in 2023

Alimentation Couche-Tard (TSX:ATD) and another top growth stock could increase dividends in 2023.

Read more »

falling red arrow and lifting
Stocks for Beginners

3 TSX Stocks That Could Rally Before 2023 Begins

Here are three TSX stocks to consider, even if inflation remains adamant next year.

Read more »