Is the Marijuana Market Undervalued or Overvalued?
It’s the burning question that has plagued the marijuana industry for months: “Is the marijuana market undervalued or overvalued?” And then, of course, the follow-up question: “What are the most undervalued marijuana stocks?”
The answers to these questions, however, are not as straightforward as you’d expect—or hope.
Here’s the thing about the most undervalued marijuana stocks: it’s all in the eye of the beholder.
By that, I mean that determining if a marijuana stock is undervalued or overvalued depends entirely on your perspective on the industry.
If you take a macro look at marijuana stocks, it’s impossible to say they are currently priced at or above value. If, on the other hand, you choose only to use currently open markets in your valuation, then of course marijuana stocks are overvalued.
The global marijuana industry is constantly expanding. Countries like Germany, the U.K., and the U.S. are making steady, if slow, progress toward laxer marijuana laws, while other countries like Canada are willing to blow the market wide open.
As such, it’s impossible to look at the marijuana market valuation and believe that the global potential of cannabis has been priced in.
It’s true that the value of the marijuana market currently outstrips projections of sales in countries like Canada. But again, that’s without pricing in the future potential of the industry.
Germany, for instance, is more than twice the size of Canada. The U.S. is about nine times bigger. Those are both massive markets that will eventually open up to recreational pot. The question is one of timing.
And that’s the real crux of the issue.
No one doubts that marijuana legalization is going to eventually hit countries like, say, the United States.
After all, poll after poll has shown that the majority of Americans favor legalization, while state legislatures across the Union are legalizing cannabis at a speedy rate. Not to mention that Democratic Party leaders have begun to make marijuana reform a mainstay of their policy reforms.
But what is in doubt is just how fast that change will come about. Will it be one year? Two years? Five years?
So, the legal cannabis industry is overvalued if you take into account current and near-future projections. But taking a step back, marijuana has only scratched the surface of what it’s really worth.
Identify Overvalued or Undervalued Marijuana Stocks
So what are some of the best ways to identify an undervalued or overvalued marijuana stock?
One of the best tools is a company’s price-to-earnings (P/E) ratio. The P/E ratio is a calculation in which the current share price is measured relative to the company’s earnings per share.
In the marijuana industry, the P/E ratio is inflated relative to most other industries. However, it serves us well when comparing marijuana companies against each other.
In fact, of the two most undervalued marijuana stocks I’m going to recommend, one relies heavily on the P/E ratio being so strong.
Another key factor to determine whether a stock is undervalued or overvalued is the company’s stock financials.
While this isn’t exactly a surprise, it does bear mentioning. Looking at the company’s production capacity, revenue, and—increasingly important—production cost per gram are all key ways to determine if a stock is about to soar or take a dive.
Most Undervalued Marijuana Stocks
So, now we have the tools to determine which marijuana stocks are undervalued and which ones are overvalued. We also understand how one’s perspective on the overall marijuana industry can change your attitude on individual cannabis stocks.
All that’s left, then, is to list a couple of the most undervalued marijuana stocks.
OraniGram Holdings Inc
The first one I’m a fan of is OrganiGram Holdings Inc (OTCMKTS:OGRMF, CVE:OGI).
On top of its stellar financial numbers, OrganiGram is globally minded, which ties into my initial point of the global market being far more lucrative than what’s currently priced in.
OrganiGram stock recently made headway into the global marijuana market with its expansion into Germany. (Source: “Organigram Announces First International Expansion Investment,” Cision, May 8, 2018.)
The company is also a big player in the exciting cannabis oil market, a fast-growing subsector of the marijuana industry.
Couple all this with strong stock financials, and we have a company that I believe has a lot of room to grow.
Canopy Growth Corp
The second of our two most undervalued marijuana stocks is an outside pick, but one I strongly believe in: Canopy Growth Corp (NYSE:CGC).
Now, it’s tempting to go after a smaller company with a bigger potential for growth and label it “undervalued,” but that has never been my investment philosophy. Frankly, that’s a far riskier venture than CGC stock.
While it may seem counterintuitive to label the largest company in the legal marijuana industry undervalued, it’s actually precisely because it is the largest company that it’s undervalued.
You see, Canopy Growth stock is a true global player in the cannabis market, with operations on several continents and in a variety of countries, from Colombia to Germany to Australia.
The company has a huge production capacity, and its marijuana market valuation reflects that, but it still doesn’t account for the true potential of CGC stock.
There are few limits to just how large Canopy Growth can get with its globally-minded expansion strategy. Therefore, I view the company as undervalued.
OGRMF & CGC Stock Performances
Check out the chart below with the 12-month performances of Organigram stock and Canopy Growth stock.
OGRMF stock is marked in blue, while CGC stock marked in black.
Chart courtesy of StockCharts.com
You’ll hear a lot of different opinions about the marijuana market valuation and, as I’ve argued, contradictory thoughts can be true at the same time. It’s all a matter of perspective.
But as someone who has long argued for a long-term view of the market, there’s simply no way to say that the industry is fully priced.
Legal cannabis has only begun to bud on the stock market and, as such, there are many undervalued marijuana stocks ripe for the picking.