Very soon, the day that investors have long waited for will finally be here. On Oct. 17, Canada will officially allow licensed dispensaries to sell recreational marijuana to adults. This will make it the first industrialized country in the world to allow the sale of adult-use weed, and only the second overall behind Uruguay to permit recreational cannabis.
But what's drawn the attention of investors are the big dollar signs behind the legalization of pot. Between domestic sales, and exports to foreign markets where medical marijuana is legal, the weed industry in Canada could rack up somewhere around $5 billion in added annual revenue, once fully ramped up. Mind you, Canadian growers have already been generating a couple hundred million dollars annually by selling to domestic medical patients and via exports to foreign markets.
Do pot stocks belong in your retirement account?
To put things mildly, finding an industry that offers the high-powered growth that marijuana stocks are promising over the next five years is practically impossible. But does this mean that marijuana stocks belong in the retirement portfolios of investors? Bluntly, no it doesn't.
Do marijuana stocks offer positives? The answer there is yes. You'd struggle to find an industry that could grow at a quicker pace. Plus, with states and foreign countries continuing to legalize medical and/or recreational pot, it could be argued that the sales potential for marijuana continues to point skyward.
There are, however, inherent flaws in the industry that need to be dealt with before retirees consider pot stocks for their portfolios.
Marijuana stocks haven't shown they can be profitable
Let's begin with the basics: a lack of profitability.
Even with triple-digit percentage sales growth expected in 2018, 2019, and perhaps even 2020 for some marijuana stocks, there are few guarantees that this added revenue will lead to strong profitability. Canopy Growth Corp. (NYSE:CGC), the largest marijuana stock by market cap, is expected by Wall Street to deliver the highest annual sales in its upcoming fiscal year. But in spite of its big leap upward in total sales, Canopy Growth could be looking at a full-year loss instead of a profit. Need I remind investors of the unsightly loss of CA$0.40 per share that the company recently reported in its fiscal first quarter? That was more than six times larger (on a per-share basis) than what it lost in the year-ago quarter.
Pot stocks haven't demonstrated that investors come first
Retirees would also be wise to keep their distance from marijuana stocks because management teams haven't yet demonstrated that shareholders come first.
For example, since the beginning of the year, Aurora Cannabis (NYSE:ACB) has announced an $852 million acquisition of Saskatchewan-based CanniMed Therapeutics, a $2.5 billion buyout of Ontario-based MedReleaf, and a partnership with Alfred Pedersen & Son in Denmark. And it's undertaken a massive buildout in Medicine Hat, Alberta, known as Aurora Sun. Though these moves are designed to give Aurora leverage as the largest projected producer of pot at 570,000 kilograms annually, the company has financed its expansion almost entirely through bought-deal offerings.
The problem with bought-deal offerings is that they're ballooning the company's outstanding share count to the detriment of investors. Having ended fiscal 2014 with just 16 million shares outstanding, Aurora Cannabis might end fiscal 2018 with close to 1 billion.
Little income to speak of
Typically, retirees prefer to add stocks to their portfolio that pay at least some form of a dividend. Dividend stocks tend to outperform their non-dividend-paying peers over the long run, and serve as beacons of a time-tested business model.
But as noted, marijuana stocks aren't even to the point yet where we can call their business model time-tested or a success. The numbers on paper would suggest that economies of scale will kick in and push growing costs down, allowing pot stocks to be profitable over the long run. But it's unclear if things in the real world will pan out as the figures have on paper.
With just a small handful of marijuana stocks offering investors an income stream, it's another knock against the idea of retirees owning pot stocks.
Industry maturation is needed
Finally, we can look at history for clues. Even though no industrialized country has ever given the green light to recreational weed before, we have seen a handful of states do so with similar results.
In Colorado, Washington, and Oregon, grower overproduction led the per-gram price of dried cannabis to plunge. Even for growers that have focused on alternative products with higher margins, such as oils and edibles, there's been no escaping the rapid decline in wholesale and retail pricing.
What this precipitous decline in pricing demonstrates is that marijuana companies throughout the supply chain don't yet understand the dynamics of supply and demand. And when Canada launches recreational pot in less than two months, its growers, processors, distributors, and retailers will be in a similar situation.
The fact is that the marijuana industry, like any other industry, needs time to mature. Until we see signs that the industry understands its demand, there's no need for retirees to consider pot stocks for their portfolios.