High-flying cannabis industry giants including Cronos Group Inc. (CRON), Canopy Growth Corp. (CGC), Tilray Inc. (TLRY) and Aurora Cannabis Inc. (ACBFF) saw their shares fall on Tuesday on the eve of legalization in Canada. One market watcher is among the skeptics who suggests that the recent weakness is warranted, given "the numbers are not there yet" in order to invest confidently in the budding market.
Weed Industry Is Large, Yet Leader Remains Uncertain, Says NYU Professor
In an interview with CNBC's "Trading Nation" on Tuesday, New York University Stern School of Business professor Aswath Damodaran argued that while there's no doubt that the pot industry is large, investors in these early stages are simply buying based on a story, not on fundamentals.
"While it's not too early to make a judgment about the overall market, especially on the medical side, I think it's a little too early to decide which of the companies that is out there, if any of them, is going to be the company that benefits from this trend," he stated.
Damodaran recommends that potential cannabis investors "stay out for the moment" until "compelling enough stories" warrant burgeoning valuations. In a recent blog post, the professor attributed weed stocks' relatively high volatility to the fact that "companies are being priced based upon the size of the potential market and incremental information."
The market watcher's comments come just as recreational marijuana is legalized in Canada on Wednesday. Damodaran expects the industry's key players to remain in Canada, while business in the U.S. is "handicapped" by differing regulations between the state and federal levels. He also warns that investors may be too optimistic on the speed of the legal industry's expansion, indicating that it will be a "slow battle" to win the market even if marijuana is legalized.
Alcohol and Tobacco Companies 'Best Suited' to Enter Cannabis Industry
For investors looking for a safer entry way into the cannabis industry, the NYU professor recommends looking into conventional players that have made strategic investments in the space. One such example is Scotts Miracle-Gro. Co. (SMG), a multinational lawn seed company that is testing its products on marijuana plants. Damodaran indicated that if Scotts Miracle-Gro loses 20% or more of its value, he'd be inclined to add it to his portfolio as a "much more promising play" in the marijuana market.
Last month, shares of Canada's Canopy Growth skyrocketed on news that U.S. beverage behemoth Constellation Brands Inc. (STZ) had invested another $4 billion in the company. Damodaran added that leading alcohol and tobacco companies are perhaps "best suited" to enter the cannabis industry, "given they know the business" of selling "sin-products" and navigating regulatory hurdles.