The green rush is officially on! This past Wednesday, following nine decades of prohibition, Canada lifted the curtain on recreational marijuana. Depending on the province, adults age 18 or 19 and older are free to purchase cannabis in licensed stores or perhaps even online throughout our neighbor to the north.
As you might imagine, legalization is expected to be a game-changer for the legal weed industry. Already generating hundreds of millions of dollars from the sale of medical cannabis and via exports to foreign countries where medical pot is legal, the influx of demand for adult-use marijuana should yield billions in added annual sales. This surge in sales is what’s expected to lead to big profits for cannabis stocks.
Unfortunately, with marijuana stocks having already shot into the stratosphere, there’s a very real possibility that…
investors could see their investments shrink from here on out. Even with such an idea probably seeming preposterous given the size of the global cannabis industry, there are three blunt marijuana facts that investors have to hear, even if they don’t want to.
1. Pot stocks aren’t profitable on an operating basis
The first thing investors need to know is that marijuana stocks aren’t anywhere near profitable on a recurring basis, even if a handful of companies have been able to report quarterly or full-year profits.
Publicly listed Canadian companies are required to report their operating results using International Financial Reporting Standards, or IFRS. One of the odd quirks of IFRS accounting is how agricultural-based companies recognize the value of their biological assets, which in this case would be cannabis plants. According to IFRS accounting, growers are required to estimate the fair value of their plants, as well as guess their selling costs, well before their pot has been fully grown or sold. This means the “value” of these biological assets changes all the time.
What’s even stranger — but again, 100% legal according to IFRS accounting — is where this fair-value adjustment is recognized on a public company’s income statement. Canadian pot stocks have chosen to…
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