There are a lot of unknowns still to be decided about Canada’s marijuana sector, says National Bank Financial money manager Rob Tetrault, but the size of the market is probably not one of them. And with the whole industry likely topping out at around $10 billion once the dust settles, it’s clear that today’s big name marijuana stocks are overvalued, he says.
The province of Ontario has just come out with a list of the first 14 cities that will feature its government-operated pot shops, come July 2018. And while the news, coupled with the recent announcement of legislation to regulate the sale and distribution of recreational pot, helps to shed a little more light on that province’s future, there is still a boatload of uncertainty about how the industry will shape up across the country.
In itself, that should be enough for investors to pause before jumping onto the pot stock bandwagon, says Tetrault. “I see risk,” he says, in conversation with BNN. “We don’t know the rules of the game yet.”
Tetrault says that aside from the unknowns, there are some basic realities about Canada’s marijuana companies, who he says are ultimately going to be suppliers within a marketplace with limited potential for growth. “At the end of the day, you’re simply a farmer, you’re simply growing these plants to bring them to someone to sell,” Tetrault says.
“We know how big that market is. The total market cap in Canada for recreational marijuana should be a six-to-ten-billion dollar valuation,” he says. “And if we look at the top stocks on the TSX, Canopy is at $3 billion, Aphria’s at 1.4 and Aurora is at 1.3 — just those three companies are already at that market cap.”
Some estimates put the number of Canadians currently using marijuana at between three and five million people. Whether that consumer population will grow once pot is legalized is the big question, although some reports suggest the number could as much as double, especially if more Canadians start opting for cannabis over alcohol as their drug of choice. A US consultancy company estimated that legalization in Canada will start out by taking about $160 million in sales away from the alcohol industry, still a small amount of a sector worth an estimated $22.1 billion annually.
Tetrault doesn’t go so far as saying that the average investor should stay clear of the industry, instead arguing that a safer route would be a marijuana ETF (exchange traded fund) like the Horizon Marijuana Life Sciences Index ETF.
But at the end of the day, the market cap should be top of mind, says Tetrault, before investing in any one particular company.
“If you’re buying one of them, you’re either of the view that they will outperform their competitors or that Canadians will start smoking more marijuana or you think that these companies will get a higher valuation than the liquor equivalent,” he says. “One of those things could happen, but if you’re [investing], that’s what you should be expecting.”