FOMO on Cannabis: From Penny to Profit?

Back early in the year, "the people" were high on Cannabis stocks. Pharmaceuticals were collaborating with growers and a hint that they were going to be used more widely to treat seizures and mental health issues. Very promising.

Then market correction came and whatever highs were wiped.

An opinion piece on Seeking Alpha estimates that in 2021, 5.65 million Canadian recreational and medical users will represent 18% of the population over 15 years. There is currently 4.9 million users or 16% over 15. And concludes that it's "overvalued by 50%."

For me, valuation is simply where investors/ the market thinks the company is going. Canopy Growth Corp (CGC) for example has no P/E as earnings are negative, as are most companies in the Cannabis space. It has only gain traction in legalization recently. And like any "new" industry, skepticism is always at play. 

Remembering Alibaba back in their prenatal phases, internet was not really a thing, and buying tangible good through a screen? It sounded absolutely bongkus. Now with Cannabis, it's really not much different. (It traded at about USD$90 in late 2014, it has now tripled.) With BABA, they were not another "Amazon", they provided a platform for sellers all over China with a guarantee that the customers would be happy with their purchase. Selling point - Cheaper alternative, guarantee to satisfy needs, it has a competitive edge because there isn't really a platform like this.

A non tech example, take A2 milk. Is the A2 protein really better than A1? People with lactose intolerant are supposedly better on strict A2. I'm no genius but if you're lactose intolerant, your body is getting inflamed from it and maybe you should not drink milk.  But consumers buy it anyway for its "claim benefits" and "superiority to home brand". For both Cannabis and A2 protein, research is still ongoing and product development is still quite early. The only caveat for Cannabis is regulation, a lengthy controversial process. But, with Canadian lawmakers codifying legislation, C-45, it has allowed 18 and above to legally possess, purchase and grow cannabis for personal use, I believe it would set a wider precedent for other countries such as the US and Australia.

Cannabis companies are growing in Australia and with good reason.

• Cheaper alternative? Possibly so, compared to traditional medication, CBD can also provide a more "natural" alternative.
• Guarantee to satisfy needs? Yes, patients with epilepsy, insomnia, eczema, pain relief, melanoma appear to have benefitted from it. Medical use is allowed only if the patient's doctor decide that is suitable, and they would have to apply for approval to prescribe it under applicable state or territory laws. The laws are still very ambiguous for medical use but is still an option.
• Competitive edge? Unlike most offshore markets which rely on greenhouse cultivation, Australia has the potential for outdoor cannabis crops and potentially two crops a year in high sunlight areas. This is possibly more efficient and would increase production. 

Pot stocks reminds me of stocks that were once penny stocks but have since surge to being portfolio-worthy. I am interested to see what this industry has to offer and definitely have a few on my watchlist. It's definitely one of the topic that is going to be a regular on Salt and Pepper 500.

Disclosure: I am long on A2.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it . I have no business relationship with any company whose stock is mentioned in this article.