For Canadian cannabis producers, market capitalizations have continued to hover around all-time highs, with revenues and profits largely disconnected from the prices investors are willing to pay today for future cash flows.
While much of the positive sentiment in this sector can be warranted – pot sales are expected to continue to grow at a healthy rate over time, the question of just how much is too much for investors to pay today has meant many fundamental investors, including myself, will remain on the sidelines for the foreseeable future.
One of Canada’s largest cannabis producers by market capitalization, Aphria Inc. (TSX:APH) has recently reported a net loss which nearly doubled, while revenue increased to $12 million, a sum which means at the company’s trailing revenue (annualized), investors are paying more than 80-times revenue, an obscenely high number for any investor, considering most fundamental long-term investors won’t pay more than 1.5 or 2-times sales for any high-growth stock.
Any time out-of-this-world earnings are promised for investors who are willing to put aside a slice of their portfolio in high-risk stocks like Aphria, volatility can be expected.
In recent months, daily increases or decreases of 10% or more have become commonplace, a situation which has proved to be positive for investors who are up handsomely on most pot stock investments this year thus far. That said, volatility works both ways, and with few fundamentals supporting the stock prices of companies like Aphria, I would caution "buyer beware" at this point in time.
Invest wisely, my friends.
