Pot stocks are for traders not investors, this portfolio manager says

Cannabis stocks have taken a beating since the legalization of recreational marijuana use in Canada on October 17, but with so much still unknown about how the industry will play out —not just in Canada but in the United States and internationally — is now the time to jump in? If you think you can make some quick money from some savvy trading, sure, says portfolio manager Rick Stuchberry, but just don’t think there’s long-term investment potential in the space.

A lot has changed for the pot stocks over the past couple of weeks, with many names losing up to half of their value during the steep drop-off following legalization.

Companies like Canopy Growth (TSX:WEED, NYSE:CGC) and Aurora Cannabis (TSX, NYSE:ACB) saw double-digit declines, while the Horizons Marijuana Life Sciences ETF (TSX:HMMJ), which tracks the North American index of cannabis companies, lost 39 per cent of its value between October 16 and October 30.

Pot stocks have popped over the last few days, and while the industry as a whole might get a boost from the US midterm elections where a number of states are voting on legalization, the sector remains in its infancy, with much still to be decided, including how big the market in Canada will be.

Stuchberry, portfolio manager at Wellington-Altus Private Wealth, says the scene is still looking more like the Wild West of the dot-com era than a mature industry.

“Put your trading hat on if you want to own these stocks, they’re not investment grade,” says Stuchberry, to BNN Bloomberg . “I relate them to the tech bubble in the late 90s when you had stock after stock moving up and up and yet they didn’t have any sales and the balance sheets were cash until they spent all the cash and then there was nothing left. The scenario looks similar. There’ll be winners in this, absolutely, because the few [tech companies] that survived in the end continued on.”

“Don’t be brought on side thinking that the valuations are cheap —they’re the antithesis of cheap. So trade it, don’t think of it as an investment,” he says.

“You don’t want to get stuck with these things because behind them you don’t have the investment potential in them if something goes really wrong. You’ve got so much competition and we’re not sure how big the field is yet. And nobody knows how big the market is yet,” he says.