After a first-half lull, marijuana stocks are on fire once again — and it’s not hard to understand why.
To begin with, Canada is set to become the first industrialized country in the world to legalize recreational marijuana. Exactly six weeks from today, adult-use cannabis will go on sale in our neighbor to the north. When the industry is fully ramped up, we should be looking at billions of dollars in annual added revenue.
Secondly, deals have been littering the cannabis space in 2018. Aside from Aurora Cannabis(NASDAQOTH:ACBFF) pulling off the largest marijuana acquisition in history (a $2.5 billion buyout of Ontario-based MedReleaf), it’s Constellation Brands‘ $3.8 billion equity stake in Canopy Growth Corp. (NYSE:CGC) that’s turned heads of late.
And lastly, there’s the continued expansion of cannabis around the globe, and the possibility that the U.S. could eventually change its tune. Recently, Oklahoma became the 30th U.S. state to have passed broad-based medical cannabis laws. More importantly, though, a widening rift between President Trump and Attorney General Jeff Sessions, an ardent opponent of marijuana, has investors excited. Should Sessions be dismissed from his position, it would be a major win for the legal cannabis movement.
Add all of this up, and it’s no surprise that the North American Marijuana Index…
— a measure of the largest growers, ancillary players, and cannabinoid-based drugmakers in North America — has nearly tripled in value over the trailing-12-month period and is up well over 650% since February 2016.
There’s little denying that marijuana stocks are in a bubble
But what if I told you that marijuana stocks were clearly in a bubble that will, eventually, burst? Don’t believe me? Here are three signs that suggest my bubble thesis will be proven correct.
1. Investors always overestimate the impact of the “next big thing”
The biggest knock marijuana stock investors have working against them is that each and every next-big-thing investment has overheated and retraced a lot of its gains over the past two decades. Whether we’re talking about the advent of the internet, internet business-to-business commerce, decoding the human genome, 3D printing, or blockchain technology, the result has been the same in every instance: a burst bubble.
Now, this isn’t to say that long-term investors weren’t handsomely rewarded if they held on to key names in these industries over the long term. If you held your shares of Amazon or Netflix well after their bubbles burst, you’ve likely come out well ahead of your initial investment. But the key point here is that it takes time for an industry to mature — even one that’s been around illicitly for a long time. It’s not going to happen overnight, and there will be unforeseen hiccups in the cannabis arena that catch investors off guard.
2. Profitability and dilution are being completely ignored
If history isn’t enough of an indicator that pot stocks are in a bubble, then perhaps Wall Street’s and investors’ rampant disregard for profitability and dilution are proof enough.
Although most marijuana stocks are expected to…
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