It’s become increasingly clear that marijuana stock bulls made — and continue to make — erroneous assumptions when evaluating the potential size of the legal marijuana market. Given these errors, the valuations of most marijuana stocks, including Aurora Cannabis (NYSE:ACB), remain way too high.
There’s one erroneous assumption that I’m sure you’ve heard. Bulls have long been saying that in our lifetimes, the cannabis market would grow as large as the alcoholic beverage market. Massive numbers of people in almost every populated area have been drinking alcoholic beverages for literally thousands of years.
By contrast, in most Western countries, people have only used cannabis for recreational purposes for around 100 years.
As a result, I recommend selling Aurora stock and all other marijuana stocks with the exception of GW Pharmaceuticals (NASDAQ:GWPH).
False Cannabis Assumptions
Let’s turn back to the alcoholic beverages comparison. Because of the discrepancy, there are many situations in which it is acceptable to drink but not to smoke.
For example, on first dates, many people would have alcoholic drinks, but very few would start smoking a joint, even in jurisdictions where cannabis is completely legal. In most cases, the same goes for a neighborhood cookout, a company holiday party, dinner at a business conference and most family gatherings. In short, drinking alcohol is just way more socially acceptable than smoking marijuana for adults in modern Western society. Consequently, marijuana consumption will never come close to alcohol consumption.
Sure, many young adults experiment with cannabis and may even smoke a great deal of pot. But that trend doesn’t often carry into adulthood, partly because using cannabis isn’t acceptable in many social situations.
Another important error was the (apparent) assumption that many or most of the people who had been obtaining cannabis illegally would be willing to pay meaningfully higher prices to obtain cannabis legally. But common sense seems to dictate that most of those who would be initially willing to buy marijuana illegally would still be willing to purchase it through unauthorized dealers after legalization.
So it appears that Aurora Cannabis — and other legal cannabis producers — can only effectively target specific Canadians. These consumers must have no qualms about using a largely socially unacceptable drug, but also worry about buying it illegally. That explains why sales of legal cannabis have been so low.
Health Issues, Legalization and Medical Marijuana
Last summer, the U.S. Food and Drug Administration warned that CBD, a component of cannabis, can be harmful. The agency stated that the compound could damage the liver or cause gastrointestinal issues. Separately, many people have gotten very sick from vaping THC, another substance in marijuana.
These health issues, in my opinion, take the idea of U.S. legalization off the table for at least a decade. Many Republicans were already opposed to legalizing cannabis beforehand. Now there is almost no chance of cannabis making its way through the U.S. Senate.
Those who are bullish on Aurora stock still seem to think that the U.S. will legalize marijuana in the near or medium term. But that’s almost definitely not going to happen.
The FDA’s statement should also put a big damper on prescriptions of medical marijuana by doctors. Most doctors, for legal and medical reasons, will not want to prescribe a drug that the FDA has said could be harmful. That could apply to physicians in Canada as well as those in the U.S.
The One Marijuana Stock That Is Worth Investing In
GW Pharmaceuticals has developed an FDA-approved drug, Epidiolex, based on cannabinoids, which are compounds in cannabis. The company launched the drug in November 2018 as a treatment for seizures, particularly in association with Lennox-Gastaut syndrome and Dravet syndrome.
The company announced preliminary 2019 revenue of $309 million, up from just $15.9 million in sales in 2018. This shows that there is strong demand for Epidiolex. GWPH is looking to get the drug approved as a treatment for tuberous sclerosis in the U.S. and Europe. It’s also starting trials to test treatments for schizophrenia, post-traumatic stress disorder and multiple sclerosis-related spasticity.
The market capitalization of GWPH stock is only $3.3 billion, indicating that the stock can easily rise a great deal more if the company receives more approvals. GW Pharmaceuticals also could be a takeover target for a larger drug company.
As of this writing, Larry Ramer did not own shares of any of the aforementioned companies.