Back in December 1999, open source software developer VA Linux pulled off its IPO, which soared nearly 700%. And yes, it was a sign that the dot-com bull market was reaching a peak. A year later, VA Linux would sink below $7 and never recover.
So could we be witnessing something similar with the cannabis mania? Just take a look at Tilray (NASDAQ:TLRY), which came public in July. The shares went from $17 to a high of $300. With considerable selling in recent days, TLRY stock has more than halved to $107 a share. Yet the market cap is still a hefty $12 billion and the price-to-sales ratio is 358X.
No doubt, it’s been a wild ride. And I can understand why some investors could be skeptical right now.
But might there be less-volatile plays in the cannabis space? Perhaps so. Consider Canopy Growth (NYSE:CGC), which has built a solid platform in the cannabis industry. Note the following:
- Canopy has operations in 11 countries on five continents.
- The company has 10 top-of-the-line production facilities in Canada.
- Some 3.2 million square feet of licensed facilities is under construction
- The company has been aggressive with R&D, with 39 patent applications.
- Canopy Growth has eight supply agreements (at 67,500 kg per year).
- There are 85,000 patients using the Canopy’s cannabis.
In light of all this, it should be no surprise that CGC stock is considered a standout. Let’s face it, many of the other operators in the market are essentially raw startups.
Canada is Fueling Growth
As for the growth potential, it does look enormous. Canopy thinks a key reason for this is that cannabis is a disruptive ingredient and could take marketshare away from beer and other beverages. After all, cannabis does not cause to hangovers, damage to your liver or a bigger waistline!
Right now, the main driver for CGC stock is the Canadian market — which does look poised for a breakout. Keep in mind that legalization for recreational use of cannabis is expected to begin on October 17. As for the estimated market size, it is about $11 billion.
Yet the most important validation for CGC stock is Constellation Brands’s (NYSE:STZ) $4 billion investment in the company, announced in mid-August. It was definitely a game changer. Not only was it a major validation of that cannabis space but STZ will provide a tremendous platform for growth.
In other words, CGC will be able to move quickly to capitalize on the countries that are exploring the legalization of cannabis (approaching 30, at last count). The company will also benefit from STZ’s understanding of brands/marketing, mergers and acquisitions and scaling operations.
Bottom Line On CGC Stock
When it comes to CGC stock — as well as TLRY — I think the dot-com boom holds some lessons. Whenever there is a massive opportunity that emerges, capital markets respond in a big way. The result is overinvestment, which ultimately leads to a bust.
However, timing is far from perfect. With the dot-com boom, the most extreme phase lasted from 1998 to 2000. So based on this, there may be more runway for the cannabis market.
But hey, there is no guarantee of this either! One of the main differences is that the cannabis market is highly regulated — and it is far from clear how many countries will ultimately change their laws. Any setbacks or delays will likely take air out of cannabis stocks.
Yet regardless of all this, if you want some exposure to this market, focusing on a top player like CGC stock is a good approach. True, going back to the dot-com days, if you invested in the marquee names like Amazon.com (NASDAQ:AMZN), you would have still suffered a steep fall when the there was a bust. But of course, had you held on, that would have been just a temporary blip.
Tom Taulli is the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
