Are cannabis stocks a safe bet for Canadians?

Forget Grandpa's stamp collection and those Beanie Babies in the attic. Canadians might just have a new golden goose: marijuana stocks. With just months left to go before recreational cannabis becomes fully legalized across the country (the date is fast approaching even if does look like the target date of July 1 will be pushed back), many Canadians are jumping at the chance to invest. Will there be a parade? A boom in snack sales? A "stoner chic" fashion movement? One thing's for sure: a whole lot of Canadians are hoping to make a whole whack of money.

But is this new market a safe bet for casual Canadian investors, or are we looking at a volatile "bud-bubble"?

Last year, four of the biggest Canadian cannabis stocks, Canopy Growth Corp., Aurora Cannabis Inc., Aphria Inc., and MedReLeaf Corp. had investment return rates in the triple-digits; forward-thinking Canadians who'd invested early were euphoric, especially given that the market, for now, is almost entirely speculative. The sky-high growth was anything but constant. Earlier that year, cannabis stocks across the board dropped 30-50% before recovering — a roller-coaster ride that might leave even the most veteran stoners paranoid and nauseous.

Experts say we're not much closer to a stable market now than we were 12 months ago. David Bernard Perron, VP of growing operations at The Green Organic Dutchman, warns that a big adjustment period lies ahead. "There's going to be a shortage of product at first, that's for sure," he said in a phone interview. "It should catch up fairly fast, by fall 2019 the projects that have started should be there, but there is currently a shortage of product."

Companies that can't keep up with demand will fall behind. "It's all speculation right now," Bernard Perron says. "There's hype and it's a bubble. Everything is overvalued and the industry is going to have to adjust after they announce."

But even the most conservative estimates anticipate enormous growth in the long run. Bernard Perron has had a front row seat to many early-adoption success stories; friends of his who invested based on social media speculation are millionaires today thanks to that gamble. "A friend of mine, a high school buddy, he invested about four years ago and he's already seen a 20-fold gain in some areas."

It's perhaps thanks to these Bud Barons that support for legalization is at an all-time high in Canada. According to a survey conducted by Gallup, support for legalized marijuana in the U.S. reached 64% in 2017, up from 25% 20 years ago. Fever dreams of a pot-fueled Silicon Valley, full of billion-dollar startups and global recognition, have converted even the most conservative among us.

The American model also lends credence to generous estimates. Three years after legalization, sales in Colorado continue to grow rapidly, up 30% per year, while sales in Washington State are up by over 50% since last year. Nevada, the most recent market to open (in July 2017), generated $60 million in sales in the first two months of operations.

But don't go selling the farm just yet. Canada's road to legalization has been rocky and regulations will play a big role in stock market success. From the Medical Marijuana Access Regulations (MMAR), which allowed patients to grow their own personal stock, to the Marijuana for Medical Purposes Regulations (MMPR), which requires patients to purchase from licensed distributors at an enormous mark-up, federal regulations will undoubtedly affect the industry. Legal sales are now regulated by the Access to Cannabis for Medical Purposes Regulations (ACMPR), a hybrid of the two systems.

Rielle Capler, a PhD Candidate at UBC and cannabis researcher believes that the success of the legal industry requires careful study of the decades-old illegal market. "Besides affordability, the legal market has to include as much of the current cannabis industry as possible, specifically small/craft producers and locally run retailers - all the options that consumers appear to prefer."

It's important to keep in mind when investing that we've yet to see what the actual regulations on the federal level are. January 20th was the deadline for federal proposals, and now the provinces must each come up with their own regulations for retail and distribution. These might vary enormously, further affecting stock prices.

Dan Bortolotti, a licensed financial advisor at PWL in Toronto, urges caution and common sense to CBC readers. "I don't think investors should be picking individual stocks at all: they are likely to be much better off using well-diversified index funds," he wrote to us by email. "Focusing on a single sector like cannabis is even more risky: it's really nothing more than speculation. It makes for good stories, but it's not a long-term strategy."

Bortolotti advises casual investors against diving into exciting fields before doing the necessary research. "Many people who are investing in these companies are doing so because they think cannabis is a sector with huge potential for growth, and they're probably right. But the market already knows this, and those expectations are already baked into the stock prices."

"If you're picking stocks, it's not enough to identify companies with potential to make big profits: you also need to identify companies that are undervalued by the market," he adds. "And that's essentially impossible for amateur investors to do consistently."

Still, there's no stopping the hype.

Capler, who began her career in the industry in 1999, has seen a dramatic shift in the conversation. When she first started telling people about her work in medical cannabis "they would laugh a little bit, or they would talk about their medical conditions; maybe they'd ask me for medical cannabis advice." She laughs. "Now the conversations I have are all about the stock market."

Chloe Rose Stuart-Ulin is a Montréal-based journalist and editor. Her non-fiction work has appeared in Ha'aretz, CBC, Lilith, Maclean's and The Garden Statuary. Follow her @chloerosewrites.