My guess is having a fear of missing out is not a reason to jump into this investment and that's especially true when it comes to any bright new hot stock picks like marijuana stocks where companies have earned nearly thirty percent year-over-year so the big question is should you be jumping on the bandwagon or should you wait on the sidelines to see how legalization shakes out? Are Marijuana Stocks Investing an Opportunity or Hype? Joining me is Chris Blake, senior portfolio manager of North American equities at TD wealth.
So Chris, I want to talk to you a little bit about the current situation. Where are we in our steps towards making marijuana legal in Canada? Well, the government appointed a task force a year ago and they've come back with their recommendations - a total of eighty recommendations have been made out of that will flow some legislation that's to be tabled at some point in the spring session.
So, you touch on some of the potential changes. What is currently being discussed or could be on the table? Well, we're going to get to a situation where marijuana is going to be available legally. The recommendation say to people over the age of 25. They step away from marketing or co-marketing with alcohol and tobacco and suggested actually these should be independent locations and they also allow for individual households to produce as many as four plants unto themselves. Now the Canadian government is expected to come out with their plan which you had alluded to in terms of the spring and the expectation is they're going to have a national policy, if that happens does it change your investment thesis at all? Not really, because at this point we really don't know what the size of the market is. There are various suggestions it could be four and a half billion dollars, it could be 20 billion dollars. I think the study that I said saw that showed 20 billion dollars was more of a number that included things as marketing and travel and other related items that really don't form a part of any market for these individual companies the growers so in terms of the overall market size obviously the the range is quite large from today's standpoint. In terms of you know if legalization happens, how much do you think it could grow?
The market itself will grow tremendously in the first stages because we have no market currently or what there is is hidden, so initially there will be tremendous growth. However, I would expect that mostly matures fairly quickly because there's a certain segment of the population who will take up the product and they probably will not grow their usage too much after they've developed whatever usage pattern they they have now.
Even if these are legitimate companies at these valuations, do you think they look too expensive?
Yeah, I would suggest that they're probably too expensive right now. I think the market sizes in around that four and a half billion dollar. Probably make more sense initially and I would say that when you have several companies trading at approximately a billion dollars in valuation that more than discounts financially.
What the valuation should be?
So you said in your report that one of the reasons you weren't going to buy marijuana stocks or you wouldn't be buying them is because they lack strategic differentiation. Can you explain what that means?
Well, the product is a plant and it grows from seeds and anyone can get the seeds and many of the seeds are going to be the same no matter who is growing the marijuana. So I don't think it's going to be very easy other than by some sort of genetic breeding or so on to try and goose the product or make the product more potent. There is within the recommendations that task force may they suggested that there should be no marketing at all so how a company or a grower is going to suggest that their product is better than the grower down the street is, is a little difficult to believe that that can happen now.
Back in November we heard some media reports that the market was overvalued and we saw a number of investors actually short marijuana stocks so at today's prices do you think this is going to continue?
I suspect that it will probably continue. There will be a lot of manipulation of the stocks based on news when positive news hits the industry like the enabling legislation hits. When it hits Parliament then it will likely cause the stocks to pop up. Words immediately they will likely fill back in because other people will take the opposite side of that trade and right now it's just a gamble. It's just a move from one set of suppositions to another and at this point nobody can be proven right because there is no market and we won't in fact see a market for a couple of years.
So let me ask you, we've heard a lot of talk about a bubble, this has been called the quote-unquote green rush. Comparisons have been made to the tech boom, we've seen growth rates of over twenty-five percent a year. Forbes is saying that this industry is not only going to grow faster but even larger than the dot-com era so clearly a very hot investment but we don't know a lot about it. So, for an investor looking at this industry today what would you tell them?
Well, I'd suggest to treat them as gambling chips. I don't think you should not think of them and as investments at this point if you feel compelled to own something like this because you do have a fear of missing out, then keep this on a short short leash and keep your finger poised over the sell button. You can now decide if Marijuana Stocks are an Investing Opportunity or Hype. Thank you very much Chris.