Will U.S. Attorney General Jeff Sessions crack down on marijuana sales in states that have legalized the drug? Or will he keep the status quo?
These questions have hung like a dark cloud over many marijuana stocks. However, two marijuana stocks won't be impacted by what Sessions does: Aurora Cannabis (ACB 8.70%) and Canopy Growth Corporation (CGC 4.76%). Both stocks are performing well in 2017 so far and appear to be headed much higher.
The Canadian Broadcasting Corporation (CBC) recently reported that the Canadian government will announce regulation in early April that will pave the way for legalization of recreational marijuana by July 2018. Use of medical marijuana is already legal in the country.
According to the CBC report, the Canadian government will license marijuana producers and will ensure that safety regulations are met. Each province, however, will determine how marijuana is distributed and sold as well as setting prices.
Canadian citizens will also be able to grow their own marijuana -- up to a point. The CBC said that the upcoming legislation will limit Canadians to four marijuana plants per household.
Legalization of recreational marijuana was a campaign promise when Canadian Prime Minister Justin Trudeau was running for office. Trudeau had come under criticism in the country for not delivering on his pledge. Police in several Canadian cities have even conducted raids of marijuana dispensaries recently, actions that some Americans fear Sessions might take in the U.S.
Aurora Cannabis and Canopy Growth are two of the leading suppliers of medical marijuana in Canada. Both stocks received an immediate boost from the CBC report -- and both have soared over the past 12 months. Aurora's share price is up close to 370% during the period, while Canopy's stock is up nearly 320%.
All of that growth was due to use of medical marijuana. In mid-2014, there were 7,900 medical marijuana patients in Canada. By the end of last year, that number had skyrocketed to 130,000.
With legalization of recreational marijuana likely on the way, the market potential for Aurora Cannabis and Canopy Growth seems ready to take off in a way that makes this growth seem small by comparison. Deloitte Touche Tohmatsu, which provides audit, consulting, tax, and advisory services to companies across the world, estimates that the retail market for marijuana in Canada could be between $4.9 billion and $8.7 billion annually.
Should investors look north?
If you're wanting to invest in marijuana stocks, looking north of the border seems to be a better alternative than buying stocks of companies dependent on the U.S. market -- at least for now. It's possible that Sessions won't target marijuana sales, but there's no guarantee.
Remember, however, that investing in marijuana stocks should be no different than investing in any other kind of stock. Growth is important -- but so is valuation.
Aurora Cannabis lost $8.3 million on $6.95 million in revenue in the second half of 2016. While we can't use earnings-based valuation metrics since Aurora is losing money, the stock currently trades at a stratospheric 95 times sales.
The story is a little better for Canopy Growth. The company reported earnings during the first nine months of last year totaling $4.5 million on revenue of $25.2 million. Canopy's stock currently trades at 60 times sales.
To put those figures into perspective, stocks for most successful companies on the market trade at no more than 10 times sales (with many trading at less than five times sales). Aurora Cannabis and Canopy Growth will need to experience astronomical growth for the stocks to be even close to typical valuations.
Can their growth be that impressive? If the CBC report is right and the Deloitte projections are on target, it's at least in the realm of possibility.