Plummeting cannabis stocks shake confidence in the industry

As Canada's legalization remains in its honeymoon phase, the cannabis marketplace is apparently coming into focus enough for investors to begin accurately gauging the potential of the up-and-coming industry.

And the first week of Canada's cannabis marketplace only brought on the worst week ever for pot stocks. Heavyweight Aurora Cannabis dropped 16 percent last week and a total of 44 percent the last seven sessions with the New York Stock Exchange.

click to enlarge Constellation Brands CEO Bill Newlands
Constellation Brands CEO Bill Newlands

The market valuation of $200 billion by Constellation Brands CEO Bill Newlands earlier this year had been outlandish enough that many conservative marketplace investors remained skeptical. And the steps to U.S. federal prohibition ending doesn't seem foreseeable in the short term, making faithful investing difficult.

Yet, the continued murkiness hasn't prevented new U.S. cannabis startups and companies going public on the Canadian Securities Exchange. The thought by many early investors is that even in this unstable time in federal prosecution/allowance, the status quo is still safe enough to trust the industry to grow moving forward.

Industry analyst and Forbes contributor Alan Brochstein wrote in October that he expects more than 100 U.S. producers to trade publicly by 2020. Citing the House Judiciary Committee's preliminary legislative efforts to allow medical cannabis research, Brochstein believes that the impediments towards safe investments in the cannabis industry are beginning to be addressed.

But that optimism isn't unanimous as many investors still see pot companies overvalued, according to analyst Laurent Grandet.

"Some suggested we were in an asset bubble that could last up to five to six years," Grandet wrote after the Institutional Capital & Cannabis Conference.

Grandet noted Newlands' Constellation Brands as one of the riskier profiles for investors, noting a lack of secondary big growth opportunities, and that the concept of beverage products entering the marketplace by 2019 highly unlikely. And even when federal legalization would occur, regulatory bodies such as the FDA would only further delay any sort of product entry any time soon.

Grandet also referenced Cannabis Trade Federation CEO Neal Levine's disclosure that the IRS currently confiscates nearly 80 percent of cannabis businesses' profits. It's clear that the potential of the plant mixed with the limits of the marketplace it would enter makes for unsteady expectations until prohibition-era roadblocks are removed. ♦

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