Is the frenzy of cannabis a case of madness of the reefers?

Marijuana has come a long way towards legitimacy and legality since the movie "Reefer Madness" of 1936. In the United States, nine states, as well as the District of Columbia, have legalized recreational use and 33 states allow medical use. Indeed, according to the Pew Research Center, more than 60% of Americans support legalization.

Although marijuana remains illegal in the United States at the federal level, the bipartite law entitled "Strengthening the 10th Amendment Through Incoming States (STATES)" has recently been adopted. If enacted, the STATES will exempt legal cannabis producers / sellers from federal prosecution and allow cash-only businesses to access the banking system.

On October 17, Canada became the second country to legalize recreational use (joining Uruguay). It is clear that the genius of legal cannabis is out of the bottle. Estimates from a legal market of $ 100 billion to $ 150 billion by 2025 have sparked a gold rush mentality among entrepreneurs and investors that has not been seen since the "dot com" boom of the late 1990s or the Bitcoin / cryptocurrency boom in 2017, both of which have ended badly.

A successful investment is a slow, laborious and disciplined process that uses the power of compound interest to support heavy loads over a long period spanning several decades. Well done, it's boring, but it's a marathon, not a sprint, and "slow and steady" wins the race. Intellectually, most investors "understand". Unfortunately, this goes against human nature, which requires immediate gratification.

The meteoric rise of Bitcoin was partly fueled by a "whiff of legitimacy" emanating from the Wall Street establishment. Similarly, liquor giant Constellation Brands (CTZ) acquired a 9.9% interest in Canadian producer Canopy Growth Corp. (CGC) and announced a partnership for the development of cannabis-infused beverages. CTZ increased its interest in CGC to 38% in August, investing an additional $ 4 billion. In addition, Bloomberg announced that Coca-Cola (KO) was also exploring drinks infused with CBD (Cannabidiol – the non-psychoactive ingredient of marijuana that treats pain but did not make you go up) and is in talks with Canadian producer Aurora Cannabis Inc. (ACBFF).

Another key ingredient of Bitcoin's last year's frenzy was its scarcity, which is still limited to 21 million pieces. Similarly, since cannabis remains illegal in the United States, cannabis-related companies operating in the United States are prohibited from listing their shares on a US stock exchange. For example, investors are limited to US companies listed in Canada or Canadian (non-US) companies listed in the United States.

Canadian producer Tilray, Inc. (TLRY), one of the few "pot stocks" traded in the United States, has been the main asset of this scarcity effect. percent of Tilray's shares. US investment bank Cowen made a bold reputation bet on Canada's nascent cannabis industry when it released the TLRY at the $ 17 IPO price on July 18.

Tilray has a tiny "float" (shares available for trading) of 17.8 million shares, resulting in dramatic volatility. TLRY closed on Friday, Sept. 14 at $ 109 and reached an intra-day high of $ 300 on Wednesday, Sept. 19, following optimistic comments from the CEO of TLRY. At the top, TLRY (which Cowen says will cost $ 42 million but will lose money in 2018) was valued at $ 30 billion (briefly evaluating Privateer's $ 23 billion stake). By contrast, Cummins, Inc. achieved a $ 1 billion business turnover on a $ 20.5 billion business in 2017 and an estimated value of $ 23 billion.

Cannabis is perhaps the wave of the future, but that does not mean that equities are a good investment. Remember two adages of investment. First, price is what you pay, but value is what you get. The "pot stocks" carry astronomical evaluations. Second, as Warren Buffett puts it, "what the wise man does at the beginning, the madman does it in the end."