Pricey pot stocks face a day of reckoning, this investment advisor says

Canada’s marijuana stocks are all the rage these days as investors pump up share prices ahead of the October start date for legalized weed.

But while a legitimate industry is definitely taking shape, current valuations for these companies are just too high, says Matt Karnes of Greenwave Advisors, even for an industry as potentially disruptive as the rec pot trade.

Cannabis stocks suffered a notable pullback on Monday, countering some but not all of the massive gains achieved last week as the sector sprang to life in response to new deals by alcohol companies looking to get in on the fledgling market for recreational marijuana. Recently, both Molson Coors and Constellation Brands announced new deals with the Hydropothecary Corporation (Quote, Chart TSX:HEXO) and sector leader Canopy Growth (Quote, Chart TSX:WEED, NYSE:CGC), respectively, spurring speculation that more activity in the space might be forthcoming.

The investor interest is understandable, says Karnes, founder and managing partner at Greenwave Advisors, who spoke to Cheddar on Monday, saying a day of reckoning is soon to come for the pot stocks.

“Every day, these stocks are moving up and up on news flow,” says Karnes. “It’s still a very nascent industry and there’s a lot of excitement and enthusiasm around these stocks. The investment by Constellation Brands into Canopy Growth, that’s clearly fuelling further speculation, but I don’t think it’s sustainable.”

“I think you’ll see some more momentum going into the actual implementation of the recreational use market. But what’s interesting is we’ll start to see what’s really under the hood as these publicly-held companies start to report their earnings,” he says. “We’ll see exactly if they’re hitting their metrics, and if there’s any miss of any sort I think the stocks will pull back accordingly.”

News broke on August 15 that alcohol giant Constellation Brands would be taking a larger stake in Canopy Growth in a US$5 billion deal that will see Constellation potentially owning up to 50 per cent of the company. That further endorsement comes after last fall’s move by Constellation to pay US$191 million for an initial 9.9 per cent stake in Canopy.

Karnes claims it’s anybody’s guess when or if more alcohol-pot mergers are on the horizon.

“Honestly, I think nobody really knows. It’s really, ‘Let’s see what happens, let’s see what sticks to the wall.’ I don’t think anybody has a really clear-cut answer into how this will all play out,” he says.