Retail investors looking to cash in on out of this world short term gains have done very well by placing a little mullah on the “budding” Canadian cannabis sector.
Producers have seen valuation multiples skyrocket, and those who have held onto positions for a year or two have seen returns which are otherwise unheard of on the TSX, given the poor performance of commodities and relatively high valuations other sectors such as financials have garnered, with much of the potential upside of future tailwinds largely priced into many of the solid long-term options Canadian investors have.
Cannabis is a sector with a bull thesis which is easy to understand, and as many Canadians who already smoke dope (legally or otherwise) can attest, the supply and demand relationship can look quite rosy on the surface.
Legalization provides a huge catalyst which many investors believe will turn the stock chart of this sector into an upward parabola, with a growth rate which will simply outpace anything the TSX has seen since a technology bubble which took the country by storm approximately 20 years ago.
For young investors who did not experience the pain of the technology bubble deflation, cannabis stocks can seem like safe bets, and “buying the dip” is one strategy some have begun to consider, given the fact that a number of high-profile names have experienced declines of 50% or more since the beginning of the year.
That being said, the cannabis sector remains one of the most overvalued bubbles I have seen in quite some time, and I expect post-legalization numbers to greatly disappoint, leading to further pain in the near to medium term.
For investors looking to pick up shares of any producer, I would suggest patience at this point in time. After all, buying Microsoft (NASDAQ: MSFT) or Apple (NASDAQ: AAPL) or Cisco (NASDAQ: CSCO) post-bubble was a good decision. Buying right before the deflation, however, not such a good move.
Invest wisely, my friends.
