In the Canadian cannabis industry, legalization has made things worse for investors, not better. Companies are dealing with red tape, excise taxes, and more competition. Meanwhile, the black market still undercuts the price of legal pot. It has been a disastrous result for both companies and investors in these businesses. It's a painful but important lesson, one that should remind investors that even if the U.S. were to legalize marijuana, that doesn't mean U.S.-based pot stocks would suddenly rise in value and become great investments.
1 number to put an exclamation mark on the Canadian cannabis industry's struggles
According to law firm Miller Thomson, Canadians have lost 131 billion Canadian dollars investing in the cannabis industry. One of the lawyers at the firm, Larry Ellis, says, "it's an industry that has been created by the Canadian government and frankly set up to fail."
It's hard to argue that point, as marijuana advertising is essentially non-existent in Canada, and even branding faces extreme limitations as packages are standardized and are full of warning labels, with only tiny areas available for logos. Limits on size also mean that recreational consumers can easily find larger quantities on the black market.
The Canadian government hasn't done the cannabis industry any favors either with the limitations it has put into place on marijuana companies. This October will mark the five-year anniversary of Canada legalizing marijuana. And while the industry has grown in size, it hasn't been a good business to get into, as public companies struggle to achieve growth and profitability.
Canadian pot stocks quickly went from boom to bust
Before legalization took place in 2018, there was a lot of hope and optimism that there would be incredible growth and earnings potential. And for that first year following legalization, companies were up big with triple-digit sales growth. But that was short-lived, and now many companies, even the larger ones in the industry, are struggling to keep sales from declining:
CGC Revenue (Quarterly YoY Growth) data by YCharts
Aurora Cannabis and Canopy Growth (CGC -1.01%) were among the biggest names in the industry in 2018, and it looked for a while as though they would be dominant forces as it grew. Instead, they have been shutting down facilities and laying off staff, all in an effort to improve their bottom lines. Canopy Growth has even been distancing itself from the Canadian pot market by divesting its Canadian retail operations. Its focus has shifted to the U.S. market, even though it remains illegal at the federal level. And even if the U.S. legalizes pot, that still doesn't mean the industry will be in a better place.
Investors should tread carefully when it comes to pot stocks
The cannabis industry is a dangerous place to invest in; shares of Canopy Growth and Aurora Cannabis are down more than 95% since October 2018. Even if you're willing to hold on for the very long haul, there's no telling which companies will be around years from now. Cannabis companies are burning through cash, and simply hanging on doesn't mean that your investment will get out of the red. Whether you're looking at Canadian or U.S.-based pot stocks, there's plenty of risk with investing in the industry. Even if legalization takes place in the U.S. in the near future, there's no guarantee that multi-state operators won't face the same kind of red tape their Canadian counterparts have been dealing with for years now.
Unless you've got a high risk tolerance, you're better off avoiding pot stocks for the foreseeable future, as things could still get much worse from here.
