Getting Into The Weeds

Summary

• Canada is legalizing marijuana for recreational use on October 17, 2018.
• The changes that are underway closely mirror the process that alcohol went through after prohibition ended in the 1920s: liquor regained social acceptance and the product proliferated.
• Investors need to figure out what something is worth and try to buy it for less. Investing in the marijuana industry is not different in that regard.
• Most investors do not understand what the space looks like, how competitive it is, what the margins look like. There are questions about just how profitable these companies can become.
• The long-term prospects for marijuana are very positive. The question is how much are you willing to pay for it?

I had the privileged to be on The Intelligent Investing Podcast with Eric Schleien (GSCM) to talk about the cannabis industry. As I'm writing this, there's no industry with a greater buzz than cannabis. The cannabis sector has been on a two-year high. Cannabis related stocks are trading at sky-high valuation. "The sky is the limit" as the saying goes. Since August, the segment has surged to a new level of hysteria on a wave of announcements. The sector got a boost when Constellation Brands (STZ), the brewer of Corona and Modelo, agreed to add $4 billion to its investment in Canada's lead weed company Canopy Growth (NASDAQ:CGC, WEED). The hysteria got a new boost when Coca-Cola (KO) confirmed an interest in spiking sports drinks with cannabidiol (CBD), the non-psychoactive ingredient of marijuana. And thanks to the DEA approving Tilray's (NASDAQ:TLRY) plan to import pot from Canada, a company with just $20 million in first-half revenue was briefly worth $30 billion.

I'm in Canada, and I have a first row seat to the mania. It's easy to see why investors got interested in marijuana. Marijuana has a hand in two worlds, fun and health (or consumer discretionary and medical to be more proper). At Tim Horton's coffee, I overheard a conversation of older men talking about marijuana stocks, and that was a couple months ago. With the income they made they probably upgraded their chat to Starbucks. People that have never bought stocks in their life are now making money on pot. I was reading that interest in self-directed investing is rapidly growing. A lot of these new accounts are young millennials picking marijuana stocks for the first time.

Marijuana is in the middle of re-branding their image. Once a batch of small, highly risky stocks that traded on obscure exchanges, cannabis shares

Analyst’s Disclosure:I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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