Reefer madness? Experts warn of marijuana mania

Recreational marijuana now legal in Canada

By PAUL R. LA MONICA, CNN BUSINESS
Ethan Miller/Getty Images

NEW YORK (CNN Business) - Recreational marijuana is legal in Canada as of Wednesday. And investors seem to have the munchies for cannabis stocks.

Shares of Canadian cannabis companies Canopy Growth (CGC), Cronos (CRON) and Tilray (TLRY) -- which trade in the United States -- have soared in the past week -- and all year for that matter.

But they have all been extremely volatile and they plunged Wednesday too, a classic case of investors buying the rumor and selling the news.

The stocks of two other Canadian companies -- Aurora Cannabis (ACBFF) and Aphria (APHQF) -- have been on a roller coaster ride lately as well, mainly due to speculation that big consumer products companies may be looking to invest in them.

There has been chatter that Coca-Cola (KO) has looked at Aurora and that Marlboro maker Altria (MO) has looked at Aphria.

The rumors make sense. Beer and wine giant Constellation Brands (STZ) has already agreed to take a more than $4 billion stake in Canopy. Some think that big pharmaceutical companies may eventually want to invest in cannabis companies too.

'Watershed moment' for marijuana

Michael Gorenstein, CEO of Cronos, wouldn't comment when asked by CNN's Julia Chatterley on the First Move show Wednesday about whether Cronos was looking to partner with a larger company.

But he said that legalization in Canada is a "watershed moment" for the industry and he expects that there will be more interest in legalizing marijuana worldwide.

"This is so meaningful. It just gets the ball rolling. We see regulatory tailwinds globally," Gorenstein said.

Nick Kovacevich, CEO of KushCo Holdings (KSHB), which makes packaging and marketing materials for marijuana companies, told CNN Business that there is a significant opportunity in the United States.

"Things are moving faster than many people think," Kovacevich said, noting that several polls are showing Democrats could take control of the House in the upcoming mid-term elections.

If that happens, Kovacevich thinks there could be more progress on changing federal laws about cannabis.

Others think that the pot hype is getting overdone.

Andrew Left, founder of Citron Research, also appeared on CNN's First Move Wednesday and said he's betting against many cannabis stocks because he thinks marijuana will not be the multi-billion dollar industry that many expect.

"There's a huge difference between being excited about an idea and it being investable," Left said. "Yes, there will be money made in cannabis. But it's not the tech boom. It's a much smaller pie."

Ken Mahoney, the CEO of Mahoney Asset Management, agreed. He compared marijuana mania to what happened with dot-com stocks in the late 1990s. That didn't end well for many, speculative stocks just trying to latch on to the internet wave.

But Mahoney said that finding the so-called "picks and shovels" in the industry -- companies that benefit from the cannabis trend but aren't growers themselves --makes more sense.

"It's crazy to pick individual companies selling marijuana. Stick to companies that can benefit from the overarching trend of legal cannabis but have diversification," he said. Mahoney likes KushCo, for example.

He is also bullish on fertilizer giant Scotts Miracle-Gro (SMG), which recently acquired Sunlight Supply, a leading maker of hydroponic products that help people grow cannabis indoors.

And Mahoney likes GW Pharmaceuticals (GWPH) -- which has a FDA-approved cannabis-based drug to treat some forms of epilepsy -- and Innovative Industrial Properties (IIPR), a real estate firm that leases properties to medical cannabis growers.

Be wary of the 'green rush'

Paul Rosen, a co-founder of Cronos who is now the CEO of Tidal Royalty, a company that invests in U.S.-based cannabis firms, agreed that there will be good investment opportunities.

But he told CNN Business that investors have to look carefully at the balance sheets of cannabis companies.

Rosen said the cannabis cultivation industry requires a lot capital and that the so-called "green rush" of excitement about pot stocks has led to valuations that are extremely high and unsustainable. Some companies will inevitably crash and burn.

He joked that not every company can become the Google of cannabis. Some will wind being Ask Jeeves.

Brady Cobb, CEO of Scythian Biosciences (SCCYF), a Canadian medical cannabis company working on treatments for concussions and other traumatic brain injuries, took issue with the comparisons to the internet stock craze.

Cobb told CNN Business the company plans on opening several medical marijuana dispensaries in Florida in early 2019.

"We're actually selling a product that people want to buy. It's not selling domain names," Cobb said.

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