Taking a look at the various options available to Canadian investors in terms of sectors, the cannabis sector has exhibited the most concrete evidence for overvaluation among its peers for some time now. Simply put, cannabis valuations make tech companies look cheap, a task which many would have surmised would be a far-fetched scenario not too long ago.
On a fundamental valuation basis, at this point in time I can find no reasonable explanation for how quickly the valuations of Canadian cannabis producers has risen relative to its cash flow potential.
Indeed, a stream of easy money has flown into the sector, providing the ability for cannabis firms to issue additional shares and continue to apply higher and higher valuation multiples in the search for quick bolt-on production capacity as the country nears legalization some time this summer.
I remain extremely skeptical of the ability of cannabis firms to produce significant free cash flows given the overly-optimistic estimates provided for market size as well as the current Provincial retail roll out and taxation plan which has been put in place for the new green commodity.
Investors interested in making a very bold short for the remainder of 2018 should consider shorting Canadian cannabis firms, increasing a short position should the price of cannabis firms continue to rise in the near to medium-term.
Given the highly volatile and speculative nature of cannabis stocks, I would advise a very small short position, given the ability for these securities to double in a very short amount of time on modest news or no news at all.
Invest wisely, my friends.
