The Canopy Bubble

Cannabis stocks continue to soar but concerns are growing regarding the stock bubble expanding to unprecedented proportions. With legalization still a month away, it’s arguably premature to speculate where the market will settle.

Barron’s Bill Alpert reports that the bubble is driven by both an emerging industry subject to steep growth and by retail level investment. Backing Canopy Growth and OrganoGram Holdings, William O’Neil and Andrew Kessner argue valuation measures may be a poor way to evaluate the market at this juncture. Simply evaluating stock based on projected earnings or sales is not an effective way to navigate this industry currently.

Cannabis stocks more than doubled in the month of August. When Bloomberg announced that Coke may be interested in a cannabis investment with Aurora, Aurora’s stocks shot up 17%. Tilray has shot up six fold since July when they began trading on the NASDAQ.

Tilray has kept it’s share prices soaring through the strategy of share scarcity. With only 6.5 million shares on the NASDAQ, Tilray shares are difficult and expensive to buy, borrow, or short.

With Canadian legalization around the corner, and growing popularity in the US for cannabis stocks, several Canadian cannabis firms are following Tilray’s lead and also entering the US stock market.

However the CEO of Canopy Growth, Bruce Linton believes his company is the driving force behind the momentum lifting the cannabis sector.

Canopy’s strategy seems to embrace the canna bubble through an aggressive growth campaign to essentially saturate and dominate the industry. They intend to make it difficult for other firms to reach their heights by choking out the industry. Canopy currently has the rights to over a third of all outstanding Canadian purchase orders as well as a significant global presence.

According to Linton, “There are a lot more companies than there are businesses.”