Investment bank analysts and scientists have a lot in common. Both have difficult jobs that are almost entirely ignored, yet they're driven by their respective employers to publish something that excites the masses.

The easiest way for an investment bank analyst to get attention lately has been with bullish commentary about marijuana stocks that trade on major U.S. markets. Unfortunately for everyday investors, analyst opinions aren't subject to a peer review before they go out.

Businesses that can't compete tend to lose money, and Canadian cannabis producers such as Canopy Growth (CGC -1.80%) and Aurora Cannabis (ACB -0.69%) don't have any solutions to beat an illicit market that operates with impunity. Here's what you need to know about a problem you won't read about in an investment bank analyst note. 

Marijuana leaf on a hundred dollar banknote.

Image source: Getty Images.

What about the illicit market?

The Cowen Group (COWN) was the first big investment bank to initiate significant coverage of the growing marijuana-stock universe. Cowen's top pot stock analyst, Vivien Azer has been extremely bullish about legal marijuana sales growth and she's a perfect example of a successful pot stock analyst who doesn't want to talk about the biggest problems her stock picks are facing.

By all indications, Azer doesn't even consider the illicit market a problem to overcome. In her eyes, a huge illicit market is just an indicator of how high the legal market can climb. A week before Canada's adult-use sales began, Azer expressed excitement because a $7 billion illicit market was being brought into the legal market.

Check out the latest earnings call transcript for Canopy Growth and other companies we cover.

It's much worse than you think

Canada's legal market for medical cannabis has been open for business since 2001, and the number of registered patients didn't reach 100,000 until 2016. By comparison, Florida's new medical marijuana program added 60,000 patients in the first six months of 2018. If you're an American that has never spoken with Canadian cannabis users about their buying habits, you're excused for not understanding the regional disparity.

Sales related to Canada's adult-use program will probably flatline before 2020 because because a quick search for "mail order marijuana Canada" brings up dozens of online outlets that accept Paypal and deliver through Canada Post. Canadian MoMs generally charge prices around 30% less by weight than licensed retailers, and that's not the only reason Canadian consumers prefer them.

The most successful MoMs receive the best reviews from consumers, which makes quality an issue they care about. Canada's licensed retail outlets are government run and apparently incapable of evaluating the quality of product before they go out. In other words, when you send the Ontario Cannabis Store $50 you might get something that you'd pay just $35 for from a MoM, but only if you're lucky. 

Canada's also dotted with marijuana dispensaries that are technically illegal, but still operate in the open because local authorities don't see anything to gain by shutting them down. That's why adults keep walking right past provincial stores and into unlicensed dispensaries that offer a wider selection at a much lower price, and have the ability to lower prices for products when they start getting stale.

Marijuana flower in a miniature shopping cart.

Image source: Getty Images.

There is no supply shortage

Pot stock analysts have been blaming softer than expected adult-use sales on a supply shortage, even though inventories at licensed producers are climbing. According to Health Canada, the supply chain held five times more ready-for-sale cannabis oil than retailers were able to sell in December and three times as much dry flower as it sold during the month. During Aurora Cannabis' latest earnings call, the company's CFO stated they will meet their contractual obligations to supply provinces, while letting their inventory rise in hopes they'll be able to sell it in European medical marijuana markets that offer higher prices.

Different strains have different effects because of their unique combination of cannabinoids and terpenes, but those substances increase at varying rates while the flowers are maturing. In fact, several hours between trimming flowers on the same plant can make a significant difference in the final outcome. Aurora and Canopy try to control as many variables as possible, but truly consistent quality just isn't possible. 

Getting a subsequent grow to mirror a previous one isn't the only challenge producers face. Under ideal conditions, cannabis can stay fresh for a couple years, but once packaged products leave a producer's warehouse, there's no telling what levels of heat and humidity they'll encounter before they reach a consumer. Half the reviews I've read from consumers that tried shopping at licensed outlets complain about paying top-shelf prices for expired product that their favorite dispensaries wouldn't put inside a free pre-rolled joint.

What the numbers say 

The numbers top pot stock analysts pay the least attention to probably come from Statistics Canada, which could be why they haven't realized how much trouble their favorite companies are in. 

Total spending on cannabis reached an estimated $2.2 billion in the fourth quarter, $770 million of which came came from legal sales. It's hard to see how the government-run adult-use program is going to improve on that figure. The average price for illegal cannabis was $4.85 per gram in the fourth quarter, while legal cannabis cost $7.23 per gram on average. 

According to an anonymous survey, quality and price are the top two concerns among Canadian marijuana shoppers, in that order, while legality wasn't even a question. As long as Canada's illicit market has the legal one beaten on both fronts that mean something, buying up shares of Wall Street's favorite cannabis producers seems like a terrible idea.