Canadian Cannabis Stocks – A Harsh Lesson In Buying On Hype

Buying Stocks On Hype

In early October, I was lucky enough to make what I figured to be a speculative purchase at the time of Canopy Growth Corporation (WEED.TO). I purchased around $2500 in WEED at $11.49 a share. Now, I did my due diligence on Canopy. Ultimately, Canopy was a company that was bleeding money, but they were starting to reduce their losses and with pending legalization almost guaranteed, I figured they would be the front-runner in the industry.

I decided to place my bet on the favorite horse to win the race you could say. Now, unless you’ve been living under a rock the last few months you know the industry absolutely exploded. Within 3 months, I had nearly quadrupled my investment. The purpose of this piece is not to brag about my amazing decision to buy Canopy, or my mistake to not sell my shares at the top when I was absolutely certain the bubble was inevitably going to burst. The point of this article will be to explain how absolutely crucial it is to do your due diligence when purchasing stocks.

Investors either ignored, or were completely unaware of these bogus valuations

At its peak, Canopy’s market cap was over 7 billion dollars. Aurora (ACB.TO) had a market cap of 5.6 billion with 15 million dollars in sales! This article from Pete Evans at CBC shines a light on the ridiculousness of these valuations. Here is a quote that really hit home for me:

“Investors have ridden the wave of pot companies, pushing valuations sky-high in the process. Canopy posted less than $40 million in revenue last year, but the company is worth more than Air Canada, who booked more than 350 times that amount of revenue over the same period.”

To the large majority of beginner investors, especially those with a large amount of FOMO, these numbers were completely ignored. “Investors” were buying these stocks at an insane rate.

The pot boom

Fortunately, I wasn’t old enough to invest in the dot-com bubble of 2000, but we can see a ton of similarities here between the two. The tech bubble of 2000 was exponentially bigger than Canada’s cannabis industry, but the line of thinking is the same. You have the giants in the industry, like Canopy Growth and Amazon. These are companies that will ride the highs and lows of an extremely volatile industry and more than likely come out on top as the stable blue-chip leaders in the sector.

The problem that arises from a bubble like this is often within the small companies. Like the dot-com bubble with tech stocks, investors are simply buying up anything pot-related. Unfortunately, they are completely ignoring the fact that the theoretical pot-pie is much, much smaller than the current sectors evaluation as a whole. They are buying these stocks up on complete hype.

Companies like Canopy, Aurora and Aphria are the lions and the cubs. They get the first share of the carcass and what is left is over is for the scavengers. Problem is in our hypothetical jungle situation, even the lions are grossly overweight. There will simply be nothing left for the scavengers when it’s their turn to eat. They will go hungry, and die.

The market isn’t as big as you think

Getting back to our jungle situation, lots of investors are simply purchasing these stocks in hopes of more food being readily available for everyone to survive.

The problem is, it just isn’t there. And although one day it may be available, investors are not just going to sit on the sidelines hoping that the industry grows to numbers that can sustain all these Company’s valuations.

I’ve seen numbers thrown around over the last few months. Most tend to peg Canada’s recreational cannabis market at 8-10 billion in revenue yearly. It doesn’t take a mathematician to figure out a major, major problem here. You’ve got one company who is almost worth the revenue of the sector. One lion who theoretically would need to eat almost the whole carcass to survive. There isn’t even going to be a hide left for the scavengers.

New investors have easy access to terrible advice

I spend a lot of time talking stocks on social media. I’m part of probably 15 plus groups and generally enjoy the conversations. One particular cluster of investing groups I participate in is cannabis stock trading. I had posted a couple weeks before the slump on a post about one particularly concerned investor stating that he is considering selling his position. He crunched some numbers on the industry as a whole and figured out current prices are unsustainable. Most posters laughed at him, posted numerous articles about how more warehouses were being built, companies acquiring others, worldwide market yadda yadda yadda.

But as I commented agreeing with him, most people called me an unintelligent, doomsday thinker that “doesn’t know anything about the stock market”. Of course, my rebuttal as someone who has done my DD on the industry was “show me some hard numbers proving your theory that all these companies will survive on these valuations”. You know the response I got? Nada. No one even acknowledged my question, they simply ignored it and continued to spew buy, buy, buy, propaganda.

The sell off was inevitable

I don’t want to come across as some sort of arrogant know it all, but it was about as easy to see this coming as the Patriots comeback to win a football game they had no business winning.

I watched people post how they had lost over $20 000 in a matter of a week. They had bought Canopy at $40+ and Aurora at $15.50+. Why? A pure lack of knowledge and foresight to what a bubble this was.

I often praise the internet and how it has revolutionized the world of investing. It’s now easier than ever to get access to knowledge bases that will teach you how to be a great investor. I hope Stocktrades is doing that for you today. But there is always a downside. If you don’t take the time to filter out the junk, there is also access to a bunch of terrible information.

Lots of these investors made purchases solely based on other peoples opinions in these groups. I probably don’t have to tell you that social media isn’t the best route to go when looking for investing information. Now, I realize these memes are complete satire, but I think this one should drive home my point.

cannabis stocks

Always, Always, ALWAYS do your own due diligence

Your money is important to you. Don’t rely on popular opinion or the opinion of others who are long on stocks. These people have an ulterior motive for pumping up the stocks they own. They don’t want you to sell. I’m sure by now you know basic supply and demand mechanics. The more people sell, the more the price goes down. Why would anyone who has a vested interest in a company tell you to sell or not buy, even if they knew it was the right decision?

The only way you can make informed intelligent investing decisions is to do your own research, and know how to do it. We have a lot of top stock posts on Stocktrades. I am completely aware that some people are simply searching these lists to find the top stocks in an industry and purchase them blindly. That isn’t the point of these articles. We give you the foundation, and you dig a little deeper.

I really hope those who bought at the peaks have the stones to just hold on. Losing $20k in a week is stressful as hell, but this industry, in my opinion, will eventually get you back to even. That’s if you invested in the lions. If you’ve got your money on the hyenas, you may be waiting a long time.

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