Few industries have been hotter on a trailing two-year basis than marijuana stocks. Even taking into account the two-month retracement in pot stocks from their all-time highs, many of the largest weed stocks by market cap have soared in excess of 1,000% from where they were at this time in 2016.

Leading the charge behind this bullishness is a combination of three factors: rapidly growing North American sales, a shift in favorability toward pot, and the potential for Canada's federal government to make history this summer.

In terms of sales, cannabis research firm ArcView, in partnership with BDS Analytics, recently noted that North American legal pot sales grew by 33% to $9.7 billion in 2017 and are slated to expand by a projected 28% annually through 2021 to $24.5 billion.

A hemp grower standing next to his crop.

Image source: Getty Images.

With regard to favorability, a number of U.S. surveys have shown growing support for legalizing marijuana. Gallup's national poll in October 2017 found that 64% of respondents favored legalizing cannabis, which compares to just 25% who favored legalization only 22 years prior.

And lastly, Canada appears ready to become the first developed country in the world, and only the second overall (behind Uruguay), to have legalized recreational marijuana. Its Senate is slated to vote on the Cannabis Act on June 7. Should it pass, it'll probably be signed into law with haste, leading to adult-use sales commencing in August or September. If approved, Canada's legal weed industry could be looking at $5 billion or more in annual sales.

This figure implies that most Canadian pot stocks are grotesquely overvalued

All of this bullishness has led to rather hefty market caps for marijuana stocks. But are these valuations in any way justified? According to Wall Street's consensus 2019 sales figures, perhaps not. Here's a brief rundown of the price-to-sales ratios for some of the larger Canadian pot stocks, based on their current market caps and consensus 2019 sales estimates.

  • Canopy Growth Corp. (NASDAQ:CGC): 21.16
  • Aurora Cannabis (NYSE:ACB): 17.53
  • Aphria (NASDAQOTH: APHQF): 13.29
  • OrganiGram Holdings (NASDAQ:OGI): 4.94
  • Supreme Cannabis Company: 5.78

On one hand, I'd give marijuana stock optimists some benefit of the doubt in that there is no precedent for legal weed sales, meaning there's no apples-to-apples comparison to be made with regard to what price-to-sales ratio should make sense for the legal cannabis industry. Furthermore, some of these growers, such as OrganiGram Holdings, aren't expected to realize their full production potential until well after 2019. OrganiGram's recently updated yield profile and expansion at its Moncton facility in New Brunswick calls for 113,000 kilograms of annual production -- but it won't be complete until April 2020.

An accountant checking figures with their calculator.

Image source: Getty Images.

Then again, if we take a closer look at other large vice industry players in the tobacco and spirit industries, we see a forward price-to-sales ratio that's considerably lower than many of these major pot players. Once again, this ratio takes into account current markets caps and Wall Street's estimated 2019 full-year sales.

  • Altria: 5.57
  • Philip Morris International: 4.35
  • Constellation Brands: 5.30
  • Anheuser-Busch InBev: 3.43

With the exception of OrganiGram -- which just so happened to be labeled as a "value stock" in the marijuana industry by yours truly -- the other pot stocks appear to be either modestly (Supreme Cannabis) or aggressively (Canopy Growth, Aurora Cannabis, and Aphria) overpriced.

A marijuana glut could do a number on Canadian pot stocks

While I'm aware that the substantially higher sales growth rates for Canadian marijuana stocks is likely fueling this premium relative to traditional vice stocks in the tobacco and spirit industries, it doesn't excuse the big unknown that could throttle the industry: oversupply.

Since there's no precedent to waving the green flag on legal pot in a developed country, growers have been expanding their capacity as quickly as their balance sheets will allow. Canopy Growth Corp. has seven facilities spanning 665,000 square feet already, and is working on constructing greenhouses over 3.7 million square feet in British Columbia. Though it hasn't divulged an annual production target, 300,000 kilograms seems feasible. 

Jars filled with dried cannabis, stacked on each other.

Image source: Getty Images.

Meanwhile, Aurora Cannabis and Aphria follow very closely behind Canopy Growth, with expected production of 283,000 kilograms and 230,000 kilograms, respectively. Add in MedReleaf and OrganiGram, which are projecting fully funded annual growth of 140,000 kilograms and 113,000 kilograms, respectively, and you have more than 1.06 million kilograms of production from just five major growers.

But here's the thing: There are over 90 licensed growers at the moment, and these aforementioned five make up a small sliver of those licenses. It would not be out of the question for aggregate supply to land between 1.5 million kilograms and 2 million kilograms a year. Unfortunately, domestic demand is only estimated to be around 800,000 kilograms.

So, where does the rest of this dried cannabis go? A lot of it is expected to be shipped to foreign markets that've legalized medical cannabis. Canada is among a very small number of countries with the OK to export dried cannabis. But can foreign countries really expect to handle 800,000 or more kilograms of annual cannabis production? No one really knows, because no one has any clue what the base level of demand will be like domestically and abroad. 

However, if Canada does experience a marijuana glut, per-gram cannabis prices would be expected to fall, creating a margin meltdown. If that's the case, the price-to-sales estimates from the likes of Canopy Growth and Aurora Cannabis are insanely high.

Unfortunately, the best investors can do at this point is to watch and wait.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.