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Michael Scott

Michael Scott

Writer, Safehaven.com

Michael Scott majored in International Business at San Francisco State University and University of Economics, Prague. He is now working as a news editor for…

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Pot Stocks Soar As Canada Legalizes Cannabis

MJ

Within a matter of weeks, Canada is poised to become the first G7 nation to legalize the recreational use of marijuana as the Senate moved Tuesday night to approve the bill. And pot stocks are soaring …

Canopy Growth Corp., the biggest producer with a $8.30-billion market cap, gained 6 percent so far today, hitting a record high before falling back slightly, while another major Canadian pot player, Aurora Cannabis Inc. gained 2-percent in early morning trading.

(Click to enlarge)

(Click to enlarge)

It’s a great day for Canada’s first billion-dollar pot producer, and also for the Canadian TSX. And it should get even better, assuming the TSX pot producers can impress investors when it comes down to the reality on the ground.

Fundamentally speaking, the reality is brilliant—but so, too, is the risk, with many analysts comparing this to the dotcom bubble.

Already, the legal cannabis market is estimated to be worth around $10 billion in North America, with Arcview Market Research projecting an expansion to nearly $25 billion over the next three years—at least if more U.S. states jump on the legalization bandwagon. Related: The Crypto Cartel: Inside Bitcoin’s Rise And Fall From $300B

"Canadian licensed producers have a chance to grab first-mover advantage in a worldwide market that U.S. agricultural and pharmaceutical companies could otherwise have been expected to dominate," wrote Tom Adams, Arcview managing director Tom Adams noted in the report carried by Canadian media. "The U.S. northern neighbour may be the world leader in moving toward a well-regulated legal cannabis industry."

But the big question is whether the flurry to get in on this before legalization has created a situation in which it’s already gotten too big, too fast.

The run on marijuana companies in Canada is a bit concerning from an investment standpoint. The case of Canopy Growth, again, is the most indicative. While Canadian media asserts that it is worth more than giant Air Canada, it’s revenues are just a drop in the bucket compared to the airline. Canopy, according to CBC.ca, posted less than $40 million in revenue in 2017, while Air Canada posted 350 times that.

That’s a bit bet on pot, and big bet that these companies can make good on their perceived potential. If not, this is going to be a massive bubble popping.

The reason investors have been so excited are estimates of potential annual revenue in the neighborhood of $5 billion.

Or, according to an April report by investment firm Cowen, cannabis sales in North America should hit around $75 billion by 2030 “supported by new analysis on category retention gaps and population-weighted, state-based analysis on cannabis first use and binge drinking (where cannabis access points to more cannabis trial and use, and less binge drinking, and an opioid solution)”.

In other words, they expect increasing pro-cannabis sentiment and legalization moves to create more cannabis users and fewer boozers.

Related: Why We Should Be Worried About Europe’s New Copyright Laws

It sounds great, but right now there are indications that the biggest and brightest of these Canadian pot stocks might end up losing money next year, even after the legalization in Canada. Even with impressive sales growth surges expected, it’s been a long, expensive road to expansion of capacity, and it will take some time to recoup those costs.

And sales aren’t likely to begin right away. Once the bill wins final approval in approximately eight to 12 weeks, it will take another eight to 12 weeks to launch sales.

Eventually, the likelihood is that this will be a huge early-bird windfall for investors, but one that requires patience. Next year isn’t likely to see these big pot players move themselves out of the black.

By Michael Scott for Safehaven.com

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