Bitcoin Has Crashed: Are Marijuana Stocks Next?

Down as much as 16% in the last week, Canopy Growth Corp (TSX:WEED)(NYSE:WEED) and other marijuana stocks’ bubbles may be bursting.

| More on:
The Motley Fool

Bitcoin was the big craze last year.

All one has to do is look at the chart that shows Bitcoin’s rise in three short months from September 2017 to December 2017 to see the euphoria — a return of over 500%!

But this year, things have shifted dramatically, and since then Bitcoin has come crashing down to the tune of 63%.

Marijuana stocks have followed a similar trajectory, as they have continued to defy gravity and valuations, trading largely on excitement and, dare I say, euphoria.

And while there are certainly many differences between marijuana stocks and Bitcoin, there are big similarities in their trading patterns: the volatility, the euphoria, the optimistic, rose-coloured glasses.

Here’s why I think marijuana stocks may finally be headed for a crash, and why I would take my profits and run at this point.

Buy on rumour, sell on news

If you have not heard of this investing advice, it is pretty much self-explanatory.

More often than not, investors bid up stock prices through rose-coloured glasses in anticipation of a positive event, focusing only on the positives, but then when the event is actually announced, reality sets in and investors begin to take a more realistic view of things, traders exit their positions, and the stock falters.

The legalization of recreational use is this upcoming event.


From the looks of things in the last week, it looks like we may be seeing the beginning of the sell-off, with Canopy Growth (TSX:WEED)(NYSE:CGC) down 16%, Aurora Cannabis (TSX:ACB) down 1.5%, and Aphria (TSX:APH) down 15%.

Looking at valuation, this downtrend makes sense to me.

I mean, WEED stock, for example, is trading at 150 times its price-to-sales multiple, it has withstood many consecutive quarters of the company, reporting larger-than-expected losses, and, at this time, it is expected that the company will generate a profit only in 2020, but this remains very uncertain.

ACB stock looks even worse, trading at a price-to-sales multiple of 190 times and still racking up losses.

APH stock is just a little different from this perspective. It’s trading at a price-to-sales multiple of 109 times, but it has at least seen profit in many of its quarters.

In conclusion, I would like to say that while I recognize these are growth companies that, by definition, will operate at losses in order to get their businesses up and running, I become skeptical when I see how these stocks have defied gravity, sending them into bubble territory, with price-to-sales multiples that are just too high.

While I recognize that the market for marijuana is huge, there is still a point where we can overpay for a great business opportunity.

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 Karen Thomas has no position in any of the stocks mentioned.

More on Investing

stock analysis

Buy the Dip: 2 Stocks to Buy Today and Hold for the Next 5 Years

These Canadian stocks are trading at discounted valuations, providing an opportunity for buying the dip.

Read more »

bulb idea thinking

Safety in Size? 2 of the Bluest Blue-Chip Stocks I’d Buy Now

TC Energy (TSX:TRP) and another cash cow have huge dividend yields for safe investors.

Read more »

A cannabis plant grows.
Cannabis Stocks

Can Aurora Cannabis Stock Recover in 2024?

Aurora Cannabis stock is down 99% from all-time highs but remains a high-risk bet, despite its cheap valuation.

Read more »

Question marks in a pile
Dividend Stocks

Where Will Brookfield Infrastructure Partners Stock Be in 5 Years?

Brookfield Infrastructure Partners (TSX:BIP.UN) kicked off 2024 with a bang. Where will it be in five years?

Read more »

TFSA and coins

TFSA Investors: 3 Incredible Stocks for 2024

Are you looking for stocks to buy and hold for years for your TFSA? These three stocks could deliver exceptional…

Read more »

A person looks at data on a screen
Stocks for Beginners

3 Warren Buffett Stocks to Hold Forever

Warren Buffett sold some shares in Apple (NASDAQ:AAPL), and the market had questions.

Read more »

Dividend Stocks

Golden Years Gain: Your CPP Benefits at Age 70

CPP users delaying pension payments until 70 will receive substantial monthly income streams in the golden years.

Read more »

data analytics, chart and graph icons with female hands typing on laptop in background
Dividend Stocks

3 Dividend Stocks You Can Safely Hold for Decades

Top TSX dividend stocks are on sale.

Read more »