The “Marijuana Bubble” Myth: Why the Doomsayers Get It Wrong

Marijuana bubble myth
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Marijuana Bubble Myth

If there’s one thing I’m not particularly fond of, it’s “column snipping.” Which is to say, I don’t like tearing apart other people’s opinion pieces. I’d rather present my own counter-arguments than tear someone else’s down.

Having said that, I recently came across a piece that I felt the need to respond to.  It has to do with the dreaded “marijuana bubble.” That column is”Invest in marijuana? What are you smoking?” (MarketWatch, February 6, 2019.)

Now, I’m not saying there’s no such thing as a marijuana bubble. There are plenty of fly-by-night companies that are going to crop up and take advantage of the green rush.

Furthermore, there are several companies that are highly overvalued and will likely collapse when all is said and done. That’s not the part that bothers me.

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No, what I disagree with about the marijuana bubble myth is that all (or at least, many) marijuana stocks are in for a bruising due to their exponential growth.

It boggles my mind that many believe that a future $100.0-billion-plus industry has already peaked with Canada. Not to disparage Canada, but that market is small. It’s a rich country, but its population and economy is tiny on a global scale.

How tiny? Its gross domestic product (GDP) is roughly the size of Texas. Population-wise, California surpasses it.

So, back to the marijuana bubble myth. The notion is often based on the fact that marijuana companies have horrible price-to-earnings (P/E) ratios and oversized valuations. Both are true, if you only take into account the legal markets that are currently open.

Recreational marijuana, for instance, is available legally in only two countries right now. One is Canada and the other is Uruguay.

Now, I love Uruguay (google “José Mujica” if you’re interested in a compelling political story), but the country has the population of a New York City suburb and the GDP about half that of Uber’s top-end valuations.

That is to say, the legal marijuana industry has only begun scratching the surface of its true potential, so all those lofty numbers are based on an open market.

How far are we from that open market? Several years, at least. But getting in early on an industry that is near guaranteed to blow up in the next decade is usually not a bad idea.

But these are common and easily debated talking points about the marijuana bubble myth.

What got me going about this particular column was the quote: “If it hits the newspapers…it’s too late to get in.” (Source: Ibid.)

Okay. Let’s test that theory, shall we?

Here’s a Financial Post headline you may remember: “Wine and beer maker Constellation Brands to acquire 9.9% stake in marijuana company Canopy Growth for $245 million.”

That was October 30, 2017.

Here’s the Canopy Growth Corp (NYSE:CGC) stock price chart since then:

Chart courtesy of StockCharts.com

Pity the poor the investor who followed the “If it hits the newspapers…it’s too late to get in” rule, huh?

Just because big events hit the mainstream newspapers doesn’t mean an investor has missed the boat.

 Analyst Take

Some marijuana companies are bad, sure, but the marijuana bubble myth is pervasive and, frankly, wrong. Savvy investors should not be scared off from cannabis stocks.