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Cannabis Stock Valuations Are Spiraling Out Of Control

Marijuana

In trading circles they say that you should be scared when even diehard bears and ultra short-sellers start backing a stock. For instance, traders like Michael Lewis, author of The Big Short: Inside the Doomsday Machine, who has openly backed marijuana, terming it the big long …

But maybe that admonition does not apply to pot stocks, which have lately been on a serious tear that reminds you of bitcoin’s heyday.

Marijuana stocks are on a rampage following a report that Johnnie Walker and Smirnoff maker Diageo PLC is in talks with no less than three Canadian pot companies seeking to purchase a stake or partner with them. That continues the ongoing trend of large international companies striking mega deals with cannabis companies.

The Global Cannabis Stock Index has climbed seven percent since the news, and is nearly 30 percent above its August 14 low.

Pot stocks that have seen serious gains include Cronos Group (NASDAQ:CRON), Tilray Inc.(NASDAQ:TLRY) and Canopy Growth (NYSE:CGC), which have all gained more than 10 percent since Friday. Canadian pot stocks like Aurora Cannabis Inc.(OTCQX:ACBFF) have also staged string rallies.

Global Cannabis Stock Index

(Click to enlarge)

The Cannabis Holy Grail

The potential of a cannabis company striking a deal or entering into a partnership with a pharmaceutical company or beverage conglomerate is considered something of a Holy Grail by pot investors. The potential deal between Diageo and pot companies comes in the wake of a $4-billion investment by booze giant Constellation Brands Inc. (NYSE:STZ) into Canopy Growth. Related: Saudi King Overrules World’s Largest IPO

The Constellation-Canopy deal, the largest to-date, more or less opened the doors for other beverage manufacturers to pursue similar deals in a bid to stay ahead of competitors.

Legal recreational use of marijuana in Canada is set to go into effect in October. Though still largely illegal in its northern neighbor under U.S. federal law, a number of states including California, Washington and Colorado have already legalized the drug. Changing attitudes in favor of weed legalization have also been notable, withmultiple polls showing high public approval ratings of as much as 64 percent.

And that’s exactly what’s been giving beverage makers like Diageo sleepless nights.

Although there are no definitive timelines for legalization Stateside, marijuana could end up seriously hurting the booze industry. RBC Capital Markets has said that legal sales of marijuana in the U.S. are quickly catching up to beer and wine and could hit $47 billion in 10 years, implying a 17-percent CAGR.

Cowen and Company has predicted that the cannabis market will generate $75 billion annually by 2030 and significantly reduce binge drinking. Further, concentrates will take over the market, as is already happening in Colorado where sales of plain vanilla weed has dropped from 70 percent of sales to just 46 percent in the space of four years.

Related: Gold, Silver Up As Trade War Fears Take A Breather

The onus is therefore on beverage companies to figure a way to remain relevant as more states allow people to light up legally.

Adding cannabis-infused beverages to their portfolios is a strategy that’s gaining popularity, with Constellation Brands and Molson Coors Brewing (NYSE:TAP) having walked that road. Molson announced in August that it was forming a joint venture with The Hydropothecary Corp. to develop non-alcoholic cannabis-infused beverages aimed for the Canadian market.

Wall Street and bankers are beginning to warm up to these companies, with middle-market banks and hedge funds such as Tiger Brands and Canaccord Genuity now willing to play ball and finance these kinds of deals. Investors should, however, invest in pot stocks with caution due to their stratospheric valuations despite many having little in the way of actual revenues.

By Alex Kimani for Safehaven.com

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