Canada’s cannabis sector is overvalued, this investor says

Canada’s cannabis sector is way overvalued, says investment manager Lorne Steinberg, who admits that he may be proven wrong once the rec marijuana sector gets up and running, but at current valuations and with so many unknowns, investing in the space just doesn’t make sense.

The Canadian Marijuana Index finished down half a percentage point on Monday, as the sector continues to slide ever since reaching dizzying heights back in late December and early January. Made up of the top 25 public companies in the sector, the index represents a total market cap of $22.72 billion, which says something about how much money is invested in the yet-to-be-proven industry, one which experts have said will likely be worth between $5 and $9 billion annually when all is said and done.

That disparity is reason number one why investors should be staying away from the sector, says Steinberg, president of Lorne Steinberg Wealth Management.

“When I look at the market caps of these companies, I have a lot of trouble understanding how someone gets to those valuations in such an early stage industry,” he said to BNN Bloomberg. “To me, growing and selling cannabis is not exactly a high-technology type of situation. Other companies can get licenses … I must confess, I don’t understand it.”

Some analysts are projecting that within just a couple of years after rec legalization, leading pot co’s like Canopy Growth (TSX:WEED) and Aurora Cannabis (TSX:ACB) will be raking in hundreds of millions in profits. Others are more skeptical, asserting that the profit margin for growing cannabis is likely to be similar to that for other cash crops like soy beans and corn — in other words, very thin — and thus, that there’s a lot less money to be made in growing pot than many are projecting.

“I may look stupid two years from now, that’s always possible. But getting in today at these valuations would scare me,” says Steinberg. “Maybe we’re missing something, but we can’t step in there as value investors.”

Currently, stocks like Canopy Growth and Aurora are trading at around 20x projected forward earnings. On Monday, Canopy closed up 0.93 per cent to $30.25 while Aurora ended up one per cent to $8.11.

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